With all eyes focused on the problems at newly listed Lotte Chemical Titan, it is notable that the last time any IPO of this size came to Malaysia’s share market was Felda Global Ventures Bhd (FGV) in 2012. Since then, FGV’s shareholders have suffered a whopping RM12.84 billion in market value erased over a five-year period from August 2012 to today.
How has this happened? Quite simply, mediocre governance and oversight of internal processes that have allowed multiple instances of financial and operational mismanagement and a series of expensive acquisitions that has depleted the billions in cash FGV raised from its IPO. The extreme weakness in FGV’s share price has allowed the vultures to circle and it’s an open secret that the two Indonesian-Chinese billionaires Martua Sitorus and Peter Sondakh are the two candidates in pole position to ‘rescue’ FGV. Sitorus is the co-founder of Singapore-listed Wilmar International, the world’s largest palm oil processor, while Sondakh controls plantation-to-mining conglomerate Rajawali Group.
Reuters reported as recently as July, citing sources, that Sitorus and Sondakh were already in advanced discussions with FGV and its controlling shareholder, Federal Land Development Authority (Felda), to buy significant holdings in FGV.
But the talks were said to have ‘ground to a halt’ because of the boardroom tussle and corruption claims at FGV, tussles that have led to the suspension of Datuk Zakaria Arshad, FGV’s group president and CEO and now-resigned chairman Tan Sri Isa Samad.
But what if the tussle was engineered? What if the larger objective was to deplete FGV’s value to a point where a rescue is necessary and Indonesia’s two Chinese billionaires are the only white knights willing able to to ride to the rescue?
Mainstream news agencies like Reuters have fallen in line with the message, saying, ‘a deal (to allow Sitorus and Sondakh to buy FGV) could have boosted FGV’s finances and given it a chance to reverse at least some of the 70 percent declines seen in its share price since its IPO in 2012.’ And that if such a deal were to happen it would actually be positive for Prime Minister Datuk Seri Najib Razak, who needs to appease FGV’s farmers.
Many of FGV and Felda’s farmer-settlers are a key vote base for Malaysia’s ruling establishment but whose livelihoods are also inextricably linked to a rescue, thanks to a land-lease arrangement that Felda inked with FGV, which sees FGV pay Felda a fixed sum of RM250 million in cash and a 15% share of operating profit annually for a 20-year period.
The suggestion that FGV’s problems have been engineered is a completely different way of viewing the current situation. But Sondakh is a known associate of Malaysia’s ruling class and has been instrumental in real-estate developments on Langkawi island as well as corporate transactions with Telekom Malaysia in he early 2000s.
Tan Sri Isa’s soft landing at SPAD (‘because PM asked me to go’) — a national institution of the highest possible import, directly or indirectly responsible for the RM55 billion East Coast Rail Link, RM60 billion KL-Singapore High-Speed Rail, RM28 billion MRT Sungai Buloh-Kajang Line and RM20 billion MRT Circle Line — adds flavour to this suggestion.
WHAT HAPPENS IF WILMAR BUYS FGV
So what happens if Wilmar manages to buy over FGV?
Wilmar is not a familiar name to Malaysians but in the world of agribusiness, it is a giant, with many parts of its business overlapping with FGV’s.
According to its website, Wilmar is today:
The world’s largest processor and merchandiser of palm and lauric oils, manufacturer of oleochemicals, specialty fats, palm biodiesel and consumer pack oils as well as crusher of palm kernel and copra crusher;
One of the largest oil palm plantation owners and the largest palm oil refiner in Indonesia and Malaysia;
The largest edible oils refiner, specialty fats and oleochemicals manufacturer as well as leading oilseed crusher, flour and rice miller, and producer of consumer pack oils, flour and rice in China; Amongst the top 10 global raw sugar producers as well as the largest raw sugar producer and refiner, and a leading merchandiser of consumer brands in sugar and sweetener market in Australia;
A leading producer of consumer pack table margarine, mayonnaise and sauces in Russia, a leading branded consumer pack oils producer, oilseed crusher and edible oils refiner in India, a leading supplier of edible oils and third largest sugar producer in Africa and one of the largest edible oils refiners in Ukraine.
It is not difficult to see how FGV would be an extremely attractive asset acquisition for Wilmar, with its 441,000 hectares of rubber and palm oil estates in Malaysia and Indonesia (supported by 72 mills producing 2.66 million metric tonnes of CPO), 35% share of Malaysia’s cooking oil segment via its flagship ‘Saji’ brand and 11 global refineries in the downstream palm segment, which includes already inked joint ventures.
That’s not all.
FGV also has a 43% market share in Malaysia’s agri-services market, thanks to its award-winning ‘Yangambi’ planting material and is also the first seed producer from Malaysia to export oil palm planting material to Indonesia.
In the logistics sector, FGV also has a vegetable oil terminal with a capacity of over 900,000 metric tonnes, 451 lorry tankers and cargoes, 15 transport hubs and two warehouses. In the sugar business, FGV is Malaysia’s biggest producer of refined sugar, with a massive 60 percent of domestic market share, thanks to annual production capacity of 1.25 million metric tonnes.
In total, Malaysia is just one of 11 countries in which FGV does business, markets which also include Indonesia, Pakistan, China and the US. If Wilmar buys FGV and controls it, nearly 19,600 employees will be affected, putting Malaysia’s food security at risk, with sugar and palm being daily staples of nearly every single Malaysian diet.
WILL WILMAR BE A FAIR OWNER?
Cartels are groups of superficially independent producers but which collude secretly to increase their collective profits by fixing prices, limiting supply, or conducting other practices that restrict the open and fair conduct of business.
Wilmar is one such producer that has been accused of price-fixing on a number of occasions. With its already considerable size, if Wilmar succeeds in buying FGV, it is catapulted into an even more powerful position to control global agribusiness, since FGV is itself such a dominant player in Malaysian palm oil and sugar upstream and downstream production.
Will Wilmar use its position in a fair way?
History suggests otherwise.
In 2007 in Pretoria, the Competition Commission of South Africa conducted a search and seizure operation at the premises of five companies involved in the manufacture and distribution of refined edible oils, baking fats and margarine — entities that were related to Wilmar. In 1993, Archer-Daniels-Midland (ADM) Company, a major shareholder in WIlmar, was the subject of a lysine price-fixing investigation by the US Justice Department, and several senior ADM officials were indicted on criminal charges.
In 1999, three of ADM’s officials, including Vice-Chairman Michael Andreas, were eventually sentenced to federal prison and the company was fined $100 million, the largest antitrust fine in US history at the time.
WILMAR: NOT A RESCUE BUT A TRAP
The implications of a Wilmar ‘rescue’ will be dire for Malaysia. There will be a significant loss of sovereignty as Malaysia will go from being the second-largest palm oil producer in the world to losing control over supply and prices. Instead, Wilmar will be able to dictate how palm products are produced and exported by Malaysia through market arbitrage and control of trade flows.
Felda smallholders and Malaysia’s natural resources will suffer significant human rights abuses and environmental trespasses — offenses that Wilmar has been accused of many times in the past. A recent incident involving the Sitorus firm occurred in May this year in West Sumatra, where the Roundtable on Sustainable Palm Oil (RSPO) ruled in favor of a complaint filed by the Kapa people against Wilmar for grabbing indigenous lands — an offense which reports say have been occurring for years and which Wilmar is currently appealing.
The Forest Peoples Programme, an NGO helping the Kapa people through the process, says the appeal is an attempt by Wilmar to stall proceedings and a tactic “to delay having to address outstanding human rights violations.” Having already secured 40% of the global CPO trade and 50% of the vegetable cooking oil market in China, it is easy to see how control of FGV by Wilmar affords it an even tighter stranglehold over global palm oil supply and prices.
Ultimately, it will be able to dictate market production to ensure pricing preferential to their needs and local palm oil companies will eventually become subservient to Wilmar’s influence. In so doing, it could well consign another once-mighty Malaysian agri-business to the annals of history, such as with rubber and before that, tin.