A privatisation gone wrong for minority shareholders

Just under six years ago, in 2006, the government represented by the Ministry of Investments, Industry and IT signed a share sale agreement with Emirates International Telecommunications (Malta) Ltd, better known as Tecom, in respect of the entire...

Pressure on the company from minority shareholders to distribute accumulated reserves which were in excess of normal requirements to all shareholders fell on deaf ears- Edward Rizzo

The sale price was €3.619 per share (equivalent to Lm1.554) when the market price at the time stood at €4.325 (equivalent to Lm1.857). The company was a very profitable telecoms operator with very little debt and a huge cash pile by local standards of €61.9 million.

The share sale agreement included a clause which related to an exchange of properties. The agreement stated that within six months, Tecom “shall procure the consent of the company (Maltacom and later Go) to enter into a deed of exchange” with the government of Malta whereby the government transfers the legal ownership of various properties to Go as well as ensuring that Go is vested with the full legal title to a number of third party properties. In consideration of such undertakings, Go will in turn be required to transfer the full legal title of the Qawra land back to the government of Malta.

At the time of the official announcement of this privatisation exercise, the media had speculated and concentrated mainly on the possibility of this share sale being part of a wider deal encompassing that of the government and Tecom in respect of the Smart City development. It was at a later stage that the minority shareholders and the media realised that a sizable tract of valuable land in Qawra on the books of the telecom company was going government’s way in exchange for full title of some properties mainly housing telephone exchanges.

The Qawra property debacle had been brought up by members of the financial community and the minority shareholders at various annual general meetings since 2006 and in a briefing with the media in April 2007, shortly after the publication of the 2006 annual financial statements, the then chairman of Maltacom plc was quoted in the media as having stated that “the Qawra property was there to remain” in the books of Maltacom and the company “had absolutely no intention of transferring the land back to the government”.

This had caused an immediate reaction from the Ministry of Investments, Industry and IT, in which it was stated that this land would be re-appropriated if Maltacom did not transfer it back to the government in terms of the May 2006 share sale agreement.

At the subsequent annual general meeting held on May 30, 2007, the chairman was again asked about the Qawra land and he had explained that this property was part of the company’s assets, it belonged to all shareholders and Maltacom intended to use the country’s laws to protect its assets.

Contradictory statements continued to be made over the following years and the minority shareholders in Maltacom were not being adequately briefed of developments taking place regarding this major issue with the government.

The Qawra land saga finally came to an end last February 24, when in a very brief company announcement, Go confirmed that it had reached an agreement with the government for the transfer of the land in Qawra in exchange for 11 properties mainly consisting of telephone exchanges which Go stated that it never had full and proper legal title to.

The announcement stated that the property transfers were valued at €13.8 million. Many shareholders today claim that there has been a lack of proper debate on the whole issue and this raises more questions than answers. Surely, minority shareholders deserve better treatment and the principles of good corporate governance dictate that such matters should be dealt with in a more transparent fashion.

Furthermore, the minority shareholders also had to face the growing losses incurred by Go due to the now infamous investment in the Greek telecoms company Forthnet. In April 2007, the chairman of Go had claimed that the new strategic partners Tecom were “very good news for Maltacom”.

Strangely enough, prior to selling its majority stake in Maltacom, the government had decided not to distribute the cash pile amounting to €61.9 million in the company to the shareholders at the time including itself as majority holders. Pressure on the company from the minority shareholders to distribute accumulated reserves which were in excess of normal requirements to all shareholders fell on deaf ears.

Tecom probably had difficulty justifying a sizable one-time dividend or various attractive dividends over a number of years to drain the surplus cash shortly after purchasing the company. Instead, Tecom argued that Go had limited growth potential in Malta and had to use the cash pile to invest in what they claimed was one of the few remaining growing telecoms markets in Europe – that of Greece.

In February 2008, Go and Tecom jointly acquired a holding company Forgendo which then purchased a sizable 25.6 per cent shareholding in the Greek company Forthnet within a five-month period. In August 2008, both shareholders then participated in a significant rights issue at Forthnet as it agreed to acquire a pay TV company which at the time was larger than Forthnet itself.

Even after the rights issue, Go and Tecom continued to purchase additional shares in Forthnet via the Athens Stock Exchange and increased their participation in the company to 41 per cent.

Only recently, Go chief executive David Kay who had been appointed as CEO of Maltacom shortly after the privatisation and had also become a director of Forthnet, had explained to the local media that the intention of Go and Tecom was to continue purchasing shares in Forth-net aiming to become majority shareholders.

The serious economic challenges in Greece since 2008 and the accumulation of excessive debt by Forthnet forced the company to seek approval of yet another €30 million rights issue a few months ago. After significant pressure from the stockbroking community and also a number of minority shareholders, Go announced on January 13 that its board of directors resolved to instruct the shareholder of Forthnet (Forgendo Limited) to vote against the €30 million rights issue.

More details on the fate of this so far disastrous investment in Greece should be announced tomorrow when Go will be publishing its 2011 financial statements and the focus will be on possibly a further large impairment of the Greek investment and the contents of the report of Go’s auditors in this respect. Only last week, Forthnet published their 2011 financial statements and while the operational performance did improve, the Greek company took a goodwill impairment of a further €125 million.

Earlier this week, Go plc made an announcement effectively informing all shareholders that subject to a combined holding of not less than five per cent of the total issued share capital, they are allowed to make a request to include items on the agenda for discussion at the next annual general meeting, provided that these reach the company by March 24.

Minority shareholders should avail themselves of such an opportunity and voice concern that their rights as minority shareholders should be better respected and the company should be more willing to share information with all shareholders more frequently, especially on material issues such as the Qawra land saga and the serious developments at Forthnet.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results.

Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

www.rizzofarrugia.com

Mr Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.

A privatisation gone wrong for minority shareholders

Sign up to our free newsletters