Mega-IPO’s 70% fall towards delisting is costly blow for Malaysia

[KUALA LUMPUR] When Facebook went public in 2012, the world’s next-largest listing that year was a company from Malaysia best known for producing cooking oil.

Morgan Stanley, JPMorgan Chase and Deutsche Bank lined up with the country’s biggest banks to manage the US$3.3 billion initial public offer (IPO) of FGV Holdings, which outperformed the social media giant in the initial months of trading.

It’s been a flop ever since, with the commodities company poised to delist this month at less than a third of its IPO price, a drop of 70 per cent.

Poor investments ate into profits, while boardroom tensions erupted into public view. Under FGV’s 10 chief executive officers since 2012, billions of US dollars in market value were wiped out, turning an episode meant to showcase a rising commodities powerhouse into a costly embarrassment for the country.

Financial scandals have tarnished Malaysia’s reputation for decades, including corporate bailouts by state-owned funds. In the case of FGV, there is no evidence of wrongdoing but it stands out for the international attention it attracted at the start and ensuing malaise. In Kuala Lumpur’s financial circles, talking about FGV prompts heavy sighs among analysts and executives, and its tale serves as a cautionary tale for investors considering exposure to government-linked companies.

“It was a lost opportunity for Malaysia,” said Ahmad Fauzi Abdul Hamid, a political science professor at Universiti Sains Malaysia. This “could have been a venture that would transform both the fortunes of smallholders and Malaysia’s standing in the global oil palm industry.”

FGV produces around 3 per cent of the world’s palm oil, used in everything from cooking oil to chocolates, though the company lags peers on key metrics like how many of the reddish-coloured fruits it can harvest from its trees and how much oil it can extract from those bunches.

The government shareholder known as Felda, or Federal Land Development Authority, has accused FGV of underperformance, which the company has previously blamed on factors including the falling price of crude palm oil and ageing trees. This is Felda’s second attempt to delist the company over the last five years, and it succeeded in recent weeks when the agency acquired more than 90 per cent of FGV. The exit offer closes on Friday. Felda said that after FGV’s removal from public markets, it will replace trees to boost yields and cut costs with technology. Top government officials said that the company will return to its original ethos of helping farmers.

FGV remains “fully committed to ensuring business continuity, creating long-term value for our shareholders, and strengthening our position as one of Malaysia’s leading agri-business companies”, it said in response to queries from Bloomberg. The company declined to comment further as the delisting is in progress. Felda said it is unable to make any statement for the same reason.

Still, many are sceptical about the future. “Privatisation is only a symbolic move to make it look as though the problems are solved,” said Adib Zalkapli, managing director of Viewfinder Global Affairs, a political risk consultancy. “But it only solves the aspect of it being in the public eye.”

The top banks on the IPO, Malayan Banking, CIMB Group Holdings, Morgan Stanley, JPMorgan and Deutsche Bank, either declined to comment or said that it does not disclose or comment on specific clients.  

Global ambitions

Decades before the problems, it was a more successful tale. Malaysia had embarked on developing farms in its lush heartland, and poor families were invited to move in and grow rubber trees and oil palms. The so-called settlers sold the produce to the government, were guaranteed an income and paid a monthly mortgage.

The scheme was organised under Felda and grew to encompass more than 110,000 families by the 1990s. This scale helped make Malaysia one of the world’s largest producers of palm oil and lifted people out of poverty, so much so that the World Bank praised Felda as “a clear example that publicly funded agencies can be efficient users of resources”.

FGV was formed in 2007 as a subsidiary meant to oversee and improve the returns of its plantations. IPO plans followed, in part so that the firm could tap capital markets instead of rely on the government for growth.

At the time of listing, FGV was touted as the third-largest oil palm plantation operator in the world with over 340,000 hectares of estates in Malaysia, about the size of Rhode Island in the US. It also had a footprint in countries abroad, from China to South Africa.

Then-Prime Minister Najib Razak promised part of the IPO proceeds would go to farmers. A general election was a year away and Felda farmers make up a crucial voting blocs.

In a speech ahead of the 2012 IPO, Najib declared the listing would be a “quantum leap” for FGV. He also took a swipe at Facebook, now known as Meta Platforms, whose shares had sunk below the offer price, saying he hoped FGV would perform better.

Bankers who worked on the IPO recalled how investors clamoured to be allocated shares as they did not want to miss out on the deal. One of the world’s biggest agricultural traders, Louis Dreyfus, took a small stake, while others who supported the IPO included Qatar’s sovereign fund, AIA Group and multiple Malaysian funds.

The shares surged more than 16 per cent on their debut in June that year.

But that did not last. The stock has not traded above its listing price since May 2014.

Louis Dreyfus, the Qatar fund and AIA declined to comment.

Acquisition spree

For almost all its time as a listed company, the portion of analysts’ hold and sell calls on FGV has outnumbered the buy calls, according to data compiled by Bloomberg. Analysts’ reports have highlighted that the company lagged peers in performance metrics and expressed scepticism about management’s rationale for some key deals.

FGV went on an acquisition spree after its listing, investing in assets from luxury condominiums to a nano carbon company. A 2019 report from Malaysia’s Economic Affairs Ministry concluded FGV spent 73 per cent of its IPO proceeds, or RM3.3 billion (S$1 billion), on such unprofitable bets.

Among the most contentious deals, its 2014 purchase of Asian Plantations later resulted in the company suing its former CEO as well as 13 other board members and executives over the acquisition, alleging breach of fiduciary duties resulting in losses. The defendants have filed their defences and the case is going to trial in September, FGV said in an April filing.

A planned investment by FGV in Indonesia’s Eagle High Plantations in 2015 caused an uproar, and executives had to defend the rationale and premium offered for the 37 per cent shareholding. FGV eventually scrapped the deal, though the stake was bought by Felda more than a year later.

In 2017, FGV’s former chairman and CEO publicly accused each other of financial misconduct, leading to a raid and probe by Malaysia’s anti-corruption agency. The status of the investigation is unclear, and the agency didn’t respond to a request for comment on the outcome.

“The reason why people are so angry is because FGV is supposed to help to increase wealth, not invest in something that is unstable or something that is fishy and does not follow the rules of procedure,” said Ahmad Martadha Mohamed, a professor of government at Universiti Utara Malaysia.

FGV’s problems were not only internal. Its profits swung alongside gyrating global palm oil prices. Investor focus on environmental, social and governance issues also intensified scrutiny of the company.

In 2020, US authorities imposed an import ban on FGV products after finding evidence of forced labour at the company. The company has said that it has taken steps over the years to fix the issue, and it’s committed to respecting human rights and upholding labour standards. It submitted a petition in June last year to modify the ongoing ban.

FGV’s problems have weighed on its biggest shareholder and, by extension, taxpayers in Malaysia.

The company’s spinoff from Felda came with an obligation to pay the parent a fixed annual fee plus a share of operating profits. Felda said that it expected to receive around RM800 million a year. Over the first nine years after the IPO, FGV paid less than half that sum in total, amounting to a shortfall of about RM4.5 billion, according to calculations by Bloomberg News. FGV did not respond to Bloomberg’s query about its payments for the four most recent years, though the firm has previously maintained it has fulfilled the financial obligations to its shareholder.

Felda has said the deficit contributed to its losses, pushing it to borrow heavily from banks. In 2019, the government unveiled a RM6.2 billion rescue package for the agency, stepping in again four years later to guarantee billions of ringgit worth of loans.

For Zhu Hann Ng, the founder of Kuala Lumpur-based fund manager Tradeview Capital, his takeaway from the saga is that foreign investors looking at Malaysia should steer clear of government-linked companies. “The government has no business being in business,” he said.

FGV’s once-lofty aspirations of being a world-class palm oil conglomerate have now shrunk to focus back on the farmers who toil on its plantations. At a recent event for the settlers, the mood was upbeat with loud local music playing and Prime Minister Anwar Ibrahim talking up the benefits of delisting.  

Yet, even some of these key stakeholders are befuddled by the events of the past decade.  

Masri Salleh has been a farmer with Felda since 1972 in Trolak Utara in the northern state of Perak. He opposed the IPO and did not buy any shares. Many of his friends did using loans, believing promises that the stock would soar in value.

“I’m stunned by what’s happening,” Masri, 75, said. “We are so tired of speaking up and not getting any answers.” BLOOMBERG