GFH 2017 USD 314.5 MM Share Offering Unexplained Lower than Promised Pricing More than Triples Dilution

Sometimes Promises of Transparency are, well, so Transparent

You Can See Right through Them

In preparing the translation of GFH’s 2019 Annual General Meeting for Fiscal Year 2018, the lament of Abdul Muhsin adDarwiish, the representative of AlRajhi, about the drop in book value per share (dilution) caused by this transaction caught AA’s eye.

Just the first examination raised enough questions for AA to take a deeper look. So here we are again.

Summary

In 2017 GFH's Board of Directors proposed that shareholders authorize the issuance of up to USD 450.5 million in new shares to be priced at USD 0.953 each to be used to acquire certain infrastructure projects and investment funds.

Later that year GFH issued some 1,186,904,148 shares.

As per AA's calculation, these shares on average were issued at a discount to par, that is below USD 0.265 per share. “  

AA can find no explanation for this discrepancy.  

So what's the big deal?  

Well, if shares were issued at the promised USD 0.953 per share, the old shareholders to use Mr. Abdul Muhsin adDarwiish’s turn of phrase would own a lot more of GFH than they do now.  Roughly 88% versus 61%.

Interested?

AA has a typical long exposition for you right below.

Detailed Exposition   

According to GFH’s FY 2017 AR Note 18 page 44, GFH assessed the value of the assets acquired as USD 297.502 million.

According to the FY 2017 AR Consolidated Statement of Changes in Owners’ Equity, GFH issued USD 314.530 million in new shares (Share Capital), recognized USD 2.896 million in Share Premium and had an adjustment of negative USD 24.3 million in the Capital Adjustment Account for a net increase in Shareholders’ Equity of USD 293.106 million.

Doing the math, on average GFH issued the new shares at USD 0.2507 per share (using the USD 297.502 million asset valuation).  That’s roughly a 5% discount from par value of USD 0.265 per share.  Some 1,186,904,148 shares were issued.  Keep both amounts (average issue price and number of shares) in mind because we’re going to come back to them later.

AA is unable to definitively “account” (pun intended) for the USD 4.396 million (negative) difference between the increase in equity and the value of assets acquired.

But suspects that these are expenses associated with the exchange based on GFH’s 2017 AR Note 2 (u) page 26 which states that:  “Incremental costs directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments.”

That’s about 1.5% of the value ascribed (USD 297.502 million).

AA thought that was the end of “intriguing” information in GFH’s AR, but then at the end of the note were two facts about the acquisition of a 56% stake in MGIC (Morocco Gateway Investment Company) and a much more modest 8% additional stake in KHCB.

1. The consideration for both of these was some USD 69.1 million and net assets (at book value) of USD 36.2 million acquired. No comment on the reason for the overpayment.  Nada.  Like GH it seems GFH was still carefully considering goodwill.  Presumably, the value of KHCB is known.  If not, that’s a serious matter.  So it’s the value of a “dream” by the Atlantic in Morocco.  As AA did with GH, he will do here. If one doesn’t know the value, how does one buy something?  Adding insult to injury the missing value here is some USD 32.9 million or some 48% of the amount paid.
2. GFH paid cash for KHCB and 203,291,786 GFH shares for an additional 56% in MGIC (roughly USD 53.8 million based on par value).

The immediate question is where did these shares come from?  

Treasury Shares?

That seems a good guess given the information we have in this Note and the CSOSE. In the sense that it doesn’t support these shares as having arisen from the share issuance/asset swap.

AA believes that there should be an adequate disclosure—the information in GFH’s 2017 AR falls quite short of that modest goal--somewhere about this transaction and more importantly about the issuance of USD 314.5 million in new shares. I didn’t find one so far. Nothing at the Bahrain Bourse or DFM, besides a very short woefully uninformative notice.

If you have seen more disclosure, let me know by leaving a comment.

So what do we do?

Dr. Abu Arqala Prepares to Go Back to the Past

Back to the Past.  To early 2017 when GFH’s Board first mooted this most excellent of ideas.

Here’s the agenda for the 2017 AGM and EGM announced 6 February 2017 on the Bahrain Bourse.

Items #2 and #3 in the EGM Agenda are pertinent to this study.

Item 2 -- “To increase the authorized capital of GFH from US$1,500,000,000 divided into 5,660,377,358 share to US$2,500,000,000 divided into 9,433,962,264 share at a nominal value of US$0.265 per share.

Item 3 -- “To discuss and approve GFH’s new strategy to acquire financial institutions, infrastructure investments, and investment assets by swapping the shares of the investors and shareholders of those companies with GFH shares through issuance of new shares by increasing the issued and paid up capital from US$ 597,994,604 to US$ 1,498,994,604 subject to obtaining all relevant authorities’ approvals, as follows:

1. Increasing the capital up to US$ 450,500,000 by way of issuance of up to 1,700,000,000 new share at a nominal value of US$ 0.265 in addition to a share premium of US$ 0.688 (total share value of US$ 0.953 – equivalent to 0.36 Bahraini Dinar / Emirati Dirham 3.5/ Kuwaiti Dinar 0.29) allocated for the acquisition of a number of infrastructure projects and investment funds.
2. Increasing the capital up to US$ 450,500,000 by way of issuance of up to 1,700,000,000 new shares at a nominal value of US$ 0.265 in addition to a share premium to be determined by the Board of Directors as per market conditions, to be allocated for the acquisition of a number of financial institutions and strategic assets.  If you look at the Arabic language EGM agenda, “strategic assets” are described as “and other investment assets (  واصول استثماریة اخرى).

So what GFH’s Board is proposing as of 6 February 2017, is to issue additional shares at USD 0.953 to acquire “a number of infrastructure projects and investment funds” as the first step. And then in second step issue an additional 1.7 billion in share at par plus a premium to be set by GFH’s Board as per market conditions.  

Why does AA say these are two steps?  

Well in the first case, GFH's Board has determined the premium so this step must proceed the second step where the premium is to be decided.  It would be "mighty strange" (to use a technical financial term) for the Board not to know what the premium is for an issuance today, but know what it will be in the future.  

Also if both steps were concurrent, it would seem "mighty strange" that the premium could be different.  What would the investors who paid USD 0.668 in premium think, if other investors were offered fine GFH shares at a premium of only USD 0,334 a month later?  Or offered shares at a discount?  Or either occurred concurrently with the USD 0.688 premium?

In neither of the proposals is there a mention of issuing at par or at a discount.  The use of the word premium implies to AA and AA would bet as well to the shareholders at the EGM that shares would NOT be issued a par or below par.

As noted above, according to information in GFH FY 2017 AR Note 16, during 2017 GFH issued some 1,186,904,148 shares and received according to AA’s analysis USD 297.502 million before assumed expenses (see above).  That is an average per share price of USD 0.2507, a 5% discount from par of USD 0.265.  After the expenses are deducted the average price per share is USD 0.244.

Now there is a share premium shown of USD 2.896 million.  If we assume that represents shares issued at USD 0.953 that would mean that roughly 4.2 million shares were issued at USD 0.953 per share resulting in an increase in share capital of USD 1.116 million with USD 2.896 million allocated to share premium for a total of USD 4.012 million. 

Pretty small beer. Roughly 0.35% (that is, 0.0035) of the total share issuance.  That is probably not what shareholders expected when they voted for this proposal. 

Based on GFH’s Board proposal they were expecting to issue up to USD 450.5 million. If they only needed one-one hundredth of that amount, surely they would have asked for a much smaller tranche.  Wouldn’t they?  That would be in the spirit of Chairman AlMutawa's statement about the new Board and management being "keen" on transparency. You'll see that just a bit further below. 

One more interim stop before we go to the minutes of the 2017 EGM. 

That is, press clarifications of an earlier clarification issued by GFH to both the DFM and Bahrain Bourse about the planned issue.

“The bank intends to increase the capital by way of issuance of new share in order to acquire infrastructure assets. The settlement (payment) to the shareholders of the infrastructure assets will be by way of issuance of new shares of GFH at rate of AED 3.5 per share. The entitlement for the new shares of GFH will only be for the shareholders of the infrastructure assets; hence the current shareholder of GFH will not be the ones subscribing to the new share issuance. It is to be noted that the new shares will be issued at fair value of the company at rate of AED 3.5 per share – as per the valuation of independent third party.”

There are two key points here:

1. Reaffirmation of the issuance of new shares at the USD 0.953 per share price.  Here expressed in AED. Now if GFH's intent was to issue only 4 million shares at this price and over 1 billion shares below par certainly they would have said something.  Wouldn't they? 
2. Even more importantly that the USD 0.953 per share price is “fair value” as determined by an independent third party.  The Board as stewards of shareholders’ interests would not issue shares at a price lower than fair market value.  Would it?

Of course, fair value could change.

While fair value and market value are not necessarily the same, let’s look at trading data from the Bahrain Bourse.   GFH’s price per share declined from USD 0.76 in early February to USD 0.50 on 14 August 2017.  A 34% decrease.

If we assume intrinsic value went from USD 0.953 in early February to USD 0.265 in August, that would be roughly a 72% decrease.  

AA’s experience with fair value theory and practice is that fair value is expected to be fairly accurate (accurate as any estimate can be) over a long period of time absent significant events.  It is an estimate of intrinsic value unaffected by market movements which are often if not always driven by sentiment as opposed to rational consideration, particularly in retail dominated markets such as those where GFH is listed.

AA would be surprised to see a drop of this nature because he is unaware of any dramatic non transitory event that might have caused this. It would have had to be quite an event to cause a drop in fair value by 72%.

Is anyone out there aware of such an event? Did AA miss something big, really big?

We’re still not finished because we know from GFH’s 2017 AR that they acquired TIBC and certain Indian assets as part of the share issuance/asset swap.  But do we know if these are the specific assets that GFH had in mind when it drafted point one to Agenda Item #3.  That is, which assets would be acquired by issuing shares at USD 0.953 per share.

Let’s take a look at the minutes for GFH’s 2017 EGM.  These are available on the Bahrain Bourse’s website, but in Arabic only.

Turn to page 5.  In the third paragraph, Mr. AlRayes, GFH’s CEO, says that the share issuance will be used to acquire infrastructure assets and investments funds similar to (a) the energy city fund in India, (b) Royal Ranches in Marrakesh, and (c) Tunis Financial Harbour Tunisia by issuing shares at USD 0.953 per share composed of par value of USD 0.265 and a premium of USD 0.688 and then goes on to give equivalents, e.g., KD 0.29, AED 3.5, and BD 0.360.  That seems crystal clear.

Looking back at GFH’s FY 2017 AR Note 18 page 44, the assets identified as having been acquired with the share issuance are:  TBIC (Tunis Bay Investment Company) and “India Projects”.

In Note 1 page 14 “India Projects” are defined as Energy City Navi Mumbai Investment Company and Mumbai IT & Telecom Technology Investment Company.PPThese seem to be just the assets Mr. AlRayes mentioned at the EGM.

No doubt some of you out there are saying. GFH got the fine assets they wanted. Stop quibbling over accounting entries.  Besides you told us that accounting and reality often don't coincide.

Quite.

But here there is a practical consequence in the real world. 

If the shares issued to purchase these assets were issued at USD 0.953 composed of USD 0.265 par value plus a premium of USD 0.688 then:

1. GFH would have issued only 312 million shares instead of 1,186.9 million. That is, it would have issued 26% of what it did issue.
2. “Old” shareholders to use Mr. Abdul Muhsin adDarwiish’s turn of phrase would own a lot more of GFH than they do now.  Roughly 88% versus 61%.  
3. BVPS would be higher. 
4. The "Old" shareholders share of future profits would be higher.

So the question is what happened?

How did USD 0.953 per share become roughly par value (USD 0.2505)?

It seems to AA that in order to issue the shares for these acquisitions at a price lower than USD 0.953 per share, GFH would have needed to call a second EGM to obtain shareholder approval.  GFH’s Board in their role as stewards of the shareholders’ money would have had to request another approval and as part of their keen adherence to transparency (شفافية) explained the unique circumstance or circumstance which caused “fair value” to change and therefore justified the change in price. Wouldn’t they?

But AA can’t find record of another EGM held by GFH prior to the August 2017 closing of the deal.

Nor do the EGM minutes appear to give the Board discretion in changing the USD 0.953 price.

And two final bon mots from the 2017 EGM, Mr. Ibrahim Salaah adDiin—apparently a long suffering shareholder since 2009 at least—noted that the previous management had in his view misled shareholders regarding GFH upcoming net losses and shareholders had endured a capital reorganization which cost them 75% of their shares in 2010 or 2011.  He noted that in 2015 the Board had stated it had no intent to increase capital.

Dr. Ahmed Mutawa, GFH’s Chairman, noted that there was a new board and new management that was (حريصين على شفافية).  Quite! The truth of that statement is evidenced in GFH’s annual reports, press releases, etc.  And, perhaps, just perhaps, on this topic as well.

Following that Mr. AlRayes, GFH’s CEO, made an argument for shareholders to approve the new strategy (Agenda Item #3) by noting the many achievements over the past few years.  And ended his comments by stating that the board’s new plan included reaching USD 4 billion in market value by 2019.  Note that is not a promise or a guarantee but merely the contents of the plan.

Could it be that the USD 0.953 issue price was also included in the board’s plan in the same way?

Kidding aside I’m sure there must be a good explanation.

Clearly, the CBB, MOICT, and authorities at the Bahrain Bourse, DFM, and Kuwait Bourse are not asleep at the switch.  They wouldn’t have allowed GFH to fail to implement the EGM resolution.

The problem is AA can’t find the explanation.

Sadly, sometimes when you’re looking for (شفافية) it is hard to find.  Perhaps, the explanation is the difference between (حارس الشفافية) and (حريص على الشفافية) (ولكن اَللّٰهُ أَعْلَم).  

That leads as you might expect to a rant.  Uncharacteristically in a separate post.