Banks DIH board made an error in buyback of shares

A letter by me published in the Stabroek News of December 11, 2016, on the decision by Banks DIH Limited to buy-back from Banks Holdings Limited, 150,138,464 shares in Banks DIH Limited provoked a four page response from Chairman and CEO, Mr Clifford Reis. As is usual for persons unwilling to deal with facts and arguments, Mr Reis went into the dangerous territory of questioning my integrity and understanding of legal documents and commercial law. He knows or ought to know me better.

Mr Reis pointedly refers to a Memorandum of Understanding entered into between Banks DIH and Banks Holdings Limited which he claims I do not understand. Forget for a moment that Banks DIH Limited has never released to shareholders a copy of that MoU. Mr Reis not only chooses to selectively and incorrectly refer to that MoU but faced with tough questions, he decided to speak of the “implied terms” and inserts into a simple, straightforward MoU words that are not there.

Mr Reis cites unnamed “legal and financial advisers” for what is a costly, damaging mistake by him and the Board of Directors he leads. The simple fact is that Banks DIH was under no obligation to repurchase any shares. Here is the relevant portion of the MoU governing the buyback of the shares.

“Banks Holdings Limited may not dispose of the shares it possesses in Banks DIH Limited as a result of this share transfer unless the first option to purchase those shares has been offered to Banks DIH Limited. The selling price of those shares shall be based on the net asset value of Banks DIH Limited as reflected in its most recent annual report or market value whichever is greater.”

It is not hard to understand that the MoU gave Banks DIH Limited a right of first refusal, not a duty to re-purchase the shares, and that the pricing formula for any possible transaction was set out in the MoU. This is no big science requiring the expertise of a major international firm; the numbers are easy to determine. The net asset value is the net book value divided by the number of shares, while the market value of the shares of a publicly traded company is the price at which the shares are traded on a recognised stock exchange, in our case GASCI.

An exception would be a case where there is a takeover bid with potential bidders trying to outdo each other for their own reasons, for example to get control of a competitor or access to backward or forward links. No such circumstance applied in the case of the Banks DIH buyback.

There was absolutely no reason for Banks DIH to buy-back the shares in the first place and worse, to engage in borrowings to pay for those shares, as Mr Reis has now admitted.

Mr Reis also admitted that the transaction was a Guyana dollar transaction and not US dollar transaction as the company had led the public to believe. He must now go the further step and tell shareholders and the public about the role, if any, of Banks DIH and its banking subsidiary in acquiring foreign currency for the transaction. Or whether Banks Holdings Limited, a Barbados company, came into Guyana, purchased twenty-six million United States dollars and transferred it to Barbados using one of the commercial banks. If that is so, those who were responsible for the purchase of US$26 million of currency either did not care or did not understand the implications of that purchase on the exchange rate of the Guyana dollar.

Finally, my response to Mr Reis’ snide remarks about misconception, seasoned commercial lawyer, misinformation, lack of knowledge and disguised reference to integrity is to recall an incident on March 5, 2003.

It arose out of a column I had done in the Sunday Stabroek (March 2, 2003) and my threat of legal action against Banks DIH Limited if it persisted with holding an improperly convened 2002-03 AGM. On March 5, Stabroek News published a letter by Mr Reis as Chairman claiming that Banks DIH had given proper notice of its AGM. Yet, during the very afternoon, I received a visit from two officials of the company offering inducements (not actual cash) if I withdrew my threat. I refused. The company then postponed the meeting, admitting improper notice.

I bear no malice or ill-will against Banks DIH Limited which I respect as an icon of the vision and entrepreneurship of Peter D’Aguiar. This share buy-back is a colossal blunder that stains the record of the company and drained it of liquidity. But I doubt the directors have the courage to admit their error.

Why was $36.79 per share paid for shares in Barbados Banks DIH when the publicly quoted price is $22.5 per share?

Banks DIH Limited has just disclosed that the 2005 Memorandum of Understanding for a mutual share investment agreement between itself and Banks Holdings Limited of Barbados has now been substantially reversed. Almost every year since 2005, the Chairman and directors of Banks DIH have touted the virtues of the agreement, the synergies from the relationship, and benefits in export sales to both companies.

Keen observers also noted enhanced procurement and governance practices with the presence of nominees of the Barbados company having a place on the Board of Banks DIH.

So it was with some surprise that the public learnt, even before the shareholders did, that in 2015 Banks DIH had sold its shares in the Barbados company. With no reason offered for walking away from the greatest opportunity to expand the export market for Banks DIH products, speculation circulated about the true motive of the Banks management.

At the time, a Brazilian company, through its St Lucian subsidiary SLU Beverages Ltd, and Ansa McAl of Trinidad and Tobago were engaged in a battle to gain control of Banks Holdings Ltd of Barbados.

A couple of days ago, in what was described as an Amended Press Release, the Executive Management of Banks DIH announced that it had repurchased 150,138,464 of its shares owned by the Barbados company. It was disclosed that the price of $36.79 per share was based on a valuation conducted by PriceWaterhouseCoopers (PWC) in December 2015.

The full page ad volunteered that throughout the “whole process” the management was guided by the company’s financial and legal advisors.

Under normal circumstances when logic and common sense are evident, my questions and comments would first have been about the failure of the Clifford Reis-led management and board to have alerted its shareholders to a number of matters.

First, why are shareholders only now learning of the proposed buyback since it was in process since December 2015; second, how can any adviser worth their fees overlook the foundational principle of company law that a change of shareholders does not have any impact on the rights and obligations of the company, in this case whether it be Banks Guyana or Banks Barbados; and third, why did the directors and management not think it helpful and necessary to advise shareholders that the money the company will be paying out on this share buyback transaction is $5,523 million.

But since the transaction defies both logic and common sense, my questions to the geniuses of Thirst Park are:

1. Why pay $36.79 per share to the Bajans for shares in Banks DIH Limited whose publicly quoted price is $22.5 per share, a premium of 64% and worth in dollar terms $2,145,478,650?

2. How do they justify handing a gain of $3.6 billion to the Bajans when the gain a year ago in the sale of shares in Banks Barbados was $1,147 million?

3. Are they aware that the $5,523 million they will pay out for these shares is more than two years of the company’s 2015 after-tax profit, more than 2.3 times the value of its share capital and about 90% of its revaluation reserves?

4. Can they indicate whether they propose to finance the transaction with borrowings? At September 30, 2015 the company’s cash reserves stood at $4,060 million, current liabilities of $4,155 million, borrowings of $585 million, and current year (2016) capital commitment of $4,607 million.

5. The currency of the selling price quoted in the Amended Press Release was Guyana dollars. Translated in US dollars, the total proceeds amounted to approximately US$26.3 million. Would the company disclose whether it paid Guyana, Barbadian or US currency?

6. Would they be willing to buy back shares held by other shareholders at the same price they paid the Barbados company? In fact, they should be willing to pay a price in excess of the $36.79 since the deal with the Barbados company had marketing and other benefits.

I am sure that all shareholders have a right to these questions being answered promptly.

DDL Annual Report 2014

The Stabroek News article on the performance of DDL for the year 2014 (S/N 03-24-15 DDL’s after-tax profit up 38.4%) comes three days before the annual general meeting (AGM) of the company. DDL has three institutional investors holding more than 5% of its issued shares – Trust Company (Guyana) Limited (20.58%), with which it shares some common directors, Secure International Finance Co Ltd (18.32%), a Beharry Group company, and the NIS (8%).

In most western countries the directors of public companies respect, if not fear, their institutional investors. Those directors are mindful of the consequences on share value of the disposal of a significant block of shares by any dis-satisfied institutional investor. To avoid that, it is very common for them to meet with their institutional investors before any major decision or action.

In those countries too, annual reports are expected to comply not only with laws but also with regulations and best practices. By contrast, Guyana companies seem less interested and are willing to take more risks with disclosure while institutional investors are perhaps the most silent group of shareholders, never asking a single question of the directors, or ever trying to influence company decisions. The casual observer can be forgiven for believing that there is some unwritten, unholy understanding by institutional investors not to interfere in the company’s business.

Consequently, the responsibility to carry out the searching analysis of the annual reports of public companies falls on the press since the small shareholder seldom has the expertise to do so for herself. The task is even greater when the company fails to meet the disclosure requirements of the law and regulations, or where its reporting is contradictory, or sometimes clouded in strange language.

For these reasons shareholders and the public would have appreciated reading beyond all the positives disclosed in the DDL Chairman’s report. I have always faulted this company for the ambiguity and confusion caused by its deliberate or inadvertent choice of words in reporting on its performance. For example, readers are often left wondering whether references to performance are to volumes or value, and are confused by the unexplained relationship between the Chairman’s statement that in Caribbean markets the brands experienced growth of 28% while the financial statements disclose a decline in revenue of 24%.

Shareholders would also like to know, and have a right to adequate explanation for growth of 25% in the US market but a fall in profits from $36 million to $2 million, and why the already statutorily inadequate information given for the US subsidiary is not given for the Canadian subsidiary for which all the reader is told is that DDL’s brands increased by 35%.

The Companies Act requires the directors of holding companies to give a report on the affairs of their subsidiaries – not just the after-tax profits of a select few. It says a lot about DDL’s disclosure policies that NICIL, hardly ever considered a model of accounting and reporting, has better disclosures on its subsidiaries than DDL does.

Commercial Banks – Quarterly Reports to June 30, 2013

Introduction
PLAINLY BUSINESS today looks at the recent reports published by the commercial banks under Supervision Guideline No. 10 – Public Disclosure of Information issued by the Bank of Guyana. Readers of the financial columns of the local media will recall that a predecessor Guideline which took effect on June 18, 2010 was revoked and replaced by a revised Guideline taking effect from the beginning of the second quarter of 2013. The new Guideline requires that quarterly calendar statements should be released within thirty days from the end of the quarter and forwarded to the Bank of Guyana. The Bank of Guyana resisted the protestations of the commercial banks that thirty days is too short a period to complete and publish reasonably accurate financial statements. Indeed, the fact that both Citizens’ Bank and Demerara Bank appear to have been unable to meet the deadline suggests that the concerns by the commercial banks may have had some merit. A consequence of this for purposes of this column is that a comparative analysis of all the commercial banks will have to wait on a later column.

Another issue on which the regulator and the regulated differed is the insistence by the Bank of Guyana that for each calendar quarter (March/June/September/December) the income statement should reflect the performance both for the quarter and cumulatively. This means that for the last quarter of any financial institution that entity will have to publish the Guideline 10 report within 30 days and then 110 days later it has to publish audited financial statements. For any institution whose year-end is not a calendar quarter – perhaps an October year-end – it will have to publish both September (calendar quarter) and October (year-end) financials. Since the average user of financial information may not be a seasoned specialist, such surfeit might cause confusion rather than provide meaningful information which is the objective of Guideline No 10.
Continue reading Commercial Banks – Quarterly Reports to June 30, 2013

Ron Webster acquired 85.31% stake in CCI for G$300,000 – and no money paid

A review by Business Page of Sunday Stabroek of May 5, 2013 of the annual reports and financial statements of three companies, including Caribbean Container Inc. (CCI), about which three concerns were raised, drew a sharp response from Mr Ronald Webster, that company’s Chairman and Managing Director in respect of one of those concerns which dealt with his controlling interest in CCI. It was Mr. Webster’s view that the column ignored certain statements in CCI’s annual reports for the years 2005 through to 2012.

So what did Business Page ignore? Here are five assertions in the reports by Mr. Webster as the company’s Managing Director and by the Board of which he is Chairman, each followed by the facts gleaned from publicly held records. I add some comments as seem appropriate.

Continue reading Ron Webster acquired 85.31% stake in CCI for G$300,000 – and no money paid