Bitter aftertaste follows F&N takeover

For those who make it to the big time, reputation is everything. In fact, it is priceless.

So publicity-shy Thai billionaire Charoen Sirivadhanabhakdi must find extremely discomfiting the bad publicity dogging Fraser & Neave (F&N). He now owns 90.3 per cent of the conglomerate after mounting a costly $13.7 billion takeover which ended in February.

Still, it is worthwhile to examine if F&N deserves the drubbing: Have the aggrieved parties been unfairly treated by F&N?

Or are they out to exact their own pound of flesh from the Thai billionaire after he paid a hefty 30 per cent premium to F&N's undisturbed price last July to secure the beverage giant?

In recent weeks, the beverage giant found itself battling claims by its erstwhile joint venture partner to buy out the 55 per cent stake of a lucrative beer-making business it runs in Myanmar.

Myanma Economic Holdings (MEHL), linked to the Myanmar military, owns the other 45 per cent of the brewery joint venture and claims it had a "clear right" to buy out F&N's stake.

F&N is also under siege from disgruntled bondholders unhappy with the payout they would be getting in return for agreeing to the spin-off of F&N's property arm as a separate listed firm.

Some market pundits have suggested that the very public spats reflect the hard-nosed manner in which F&N's new owners go about pursuing their businesses.

But so far, F&N has maintained a dignified stand. That, some say, may be unwise in view of the considerable lengths to which its opponents have gone to air their discontent in the media.

On MEHL's claim, F&N maintains that it would "vigorously resist" a claim which it said had no basis. It also questioned MEHL's US$246 million (S$306 million) valuation of its 55 per cent stake in Myanmar Brewery, the company in contention.

As a yardstick for comparison: In the January 2013 letter sent to F&N shareholders advising them of the takeover offer made by Mr Charoen, investment bank JPMorgan valued F&N's stake in Myanmar Brewery at $230 million to $691 million.

Seen in that light, MEHL's $306 million offer would appear to be on the low side. But the stakes are high.

Myanmar Brewery is the country's largest taxpayer with an 83 per cent market share of the beer market through sales of brands such as Myanmar Beer and Myanmar Double Strong.

In the years to come, Myanmar Brewery is likely to become even more valuable as alcoholic consumption in Myanmar catches up to reach the levels seen in neighbouring markets such as Vietnam and Cambodia.

That makes Myanmar Brewery a choice target for deep-pocketed suitors who would be willing to pay a fat premium for it, to get their hands on the rapidly expanding Myanmar beer market - if MEHL successfully dislodges F&N from the brewer.

While MEHL has taken pains to stress that the dispute relates to allowing parties to exercise their contractual rights, it is being watched nervously by the international business community now queueing to do business in Myanmar.

The Financial Times said: "Whatever the legal merits of the case, it is a particular warning about the risks of doing business with institutions linked to the country's still-powerful military."

The spat also highlights broader worries about launching joint ventures with local partners, which are compulsory in some industries - for instance, the offshore oil concessions now up for grabs in Myanmar, it added.

And how about the bondholders' grievances?

It is standard practice in any loan or bond agreement to have a non-disposal clause to ensure that the borrower does not hive off a profitable business that may leave him unable to service his interest payment.

So, before the borrower presses ahead with his divestment plans, he has to get his lender's permission or repay the loan early, together with any outstanding interest.

In F&N's case, servicing the bond coupon payment is not an issue after spinning off its property arm. In fact, the company is even prepared to make early redemption of the bonds with accrued interest and an additional pre-payment equal to half of the bond's coupon to allay any such concerns.

Thus, it is ironic that bondholders should use the non-disposal clause to press F&N for an even better payout, or face a technical default if it goes ahead with its spin-off without their consent.

Whichever way F&N decides to go in dealing with its disgruntled Myanmar partner and unhappy bondholders, there will be huge ramifications on the way businesses are conducted here and elsewhere in the region. It should tread carefully, lest it set a bad precedent.

engyeow@sph.com.sg

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