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Home > Articles > PN4s - What's Went Wrong?

PN4s - Unipheonix Corporation


Acquisition of API and HIV

Uniphoenix Corporation (Uniphoenix) was incorporated on 17 Apr 1989 with the purpose of rescuing Amalgamated Properties & Industries Bhd (API), a group of companies engaged in manufacturing plastic products & packaging materials, property development and specialist contracting for ceiling, floor & partitioning systems. API began its operations in the late 1970s, and performed well until the mid-1980s, when poor market conditions due to lower demand and competitive pricing resulted in losses for the company. API's performance deteriorated rapidly and by 31 Dec 1989, it had a deficit in shareholders' funds of RM26.17 mln. API was in dire need of a 'white knight', and Uniphoenix was a suitable candidate. In May 1990, Uniphoenix issued 19.3 mln new shares to acquire 100% of API. To finance its new operations, Uniphoenix further issued [1]. 46.11 mln new shares to a director of Uniphoenix at RM1.10 per share to settle outstanding debts of API and [2]. Completed a rights issue of 28.95 mln shares at RM1.00 each.

At the same time, Uniphoenix intended to make property development as one of its core activities, and acquired 100% of Heavy Industries Valley S/B (HIV) from Heavy Industries Corporation of Malaysia Bhd (HICOM) and Fawanis S/B for RM70 mln by issuing 63.64 mln new shares at RM1.10 per share. HIV was a property developer and owned a net saleable area of 198.55 acres of mixed industrial, commercial and residential development land in Shah Alam as at Aug 1989.

Overpaying For API

Uniphoenix overpaid for the acquisition of API. It paid RM19.3 mln, as well as assuming RM27.1 mln of API's net liabilities, giving rise to goodwill of RM46.4 mln. Figure 1 shows the deteriorating losses of the manufacturing division, which was API's core activity, with the reasons for the poor results stated below.

Also Overpaying For HIV

Figure 1 shows the pretax profit from the property development division, where HIV contributed significantly. Uniphoenix paid RM70 mln to acquire HIV, paying a premium of RM50.1 mln over HIV's net asset of RM19.91 mln as at 1990. This represented a purchase consideration of 3.5 times over the net asset value of HIV, which seems somewhat expensive. Although the profit was sufficient to cover the goodwill paid, the figures are less impressive on an after tax basis. Perhaps one reason why Uniphoenix was willing to pay such a premium for HIV was that the goodwill on acquisition was strangely categorised as "Properties under development" in its current assets. Not only did this put the group's current ratio in a better light, it also meant that its profit was higher.

Figure 1 : PBT

A Major Diversification, A Major Folly

In 1992, Uniphoenix acquired an 80% interest in Halim Securities S/B (Halim), a stockbroker located in Petaling Jaya, for RM64 mln, settled with RM32 mln cash and 13.06 mln new shares at RM2.45 each. The group's timing to enter into the share broking industry was good, as 1993 saw a strong bull run and as shown in Figure 2, Uniphoenix benefited greatly in that year. Unfortunately, the group did not manage this business well and did not control its debtors. When the Great Asian Crisis hit, it suffered a massive pretax loss of RM365 mln, of which RM396.01 mln was for provision for doubtful debts and bad debts written off. Subsequently, Halim was placed under trading restriction on 4 Feb 1998 and KLSE took control of the subsidiary on 23 Mar 1998.

Figure 2

Warning Signs

By 1996, there were signs that the group was facing serious problems. As shown in Table 1 below, Uniphoenix's pretax profit dropped drastically, mainly due to its unsuccessful expansion into various manufacturing activities. In the same token, Uniphoenix increasingly relied on debt to finance its expansion programme, which led to high interest costs. Current ratio also declined, due to large increases in short-term borrowings. The group's liquidity position suffered due to its massive capital expenditure, and it also had to set aside funds every year for the redemption of its loan stocks. Uniphoenix remained in debt despite selling many of its subsidiaries for RM44.6 mln in 1996.

Its core activities in the manufacturing division were manufacturing of plastic & packaging materials and rubber processing, with metal fabrication, chemical & food processing and sterilization making up the remaining activities. Uniphoenix boasted of having Malaysia's first malt-processing plant and irradiation facility, as well as being the biggest rubber glove producer in the world. Yet, despite all the investment spent in the manufacturing division, the results were totally dismal. The reasons why the manufacturing division failed can be summed up as follows: [1]. High initial start-up costs which resulted in massive depreciation and interest costs; [2]. Rising raw material prices in the packaging and latex rubber thread industry which resulted in lower profit margins; [3]. Keen competition in the packaging industries arising from new entrants and enlarged industry capacity; [4]. Delay in commissioning and relocation of machinery from overseas.

Table 1: Financial Highlights

Far Too Ambitious

Somewhere from the early to mid-1990s, Uniphoenix aggressively expanded its operations. Total net assets surged from RM133.4 mln in 1990 to RM427.1 mln in 1995, mainly funded by short and long-term borrowings. In 1992, Uniphoenix issued loan stocks totalling RM147.8 mln, to finance its expansion programme into stock brokering, information technology, manufacturing and property development. From 1992-1996, Uniphoenix spent around RM225 mln on fixed assets, predominantly on land & buildings and plant & machinery for its manufacturing division. The blame for the group's poor showing really lies with its senior management in expanding into so many different businesses in such a short time without the necessary skills, planning, experience and financial resources. It was as if management did not exist. The enlarged group was simply a disaster waiting to happen.

Unsuccessful Debt Restructuring

Table 2 shows the exceptional items which contributed to a loss of RM569.2 mln in 1998. Provision for doubtful debts made up a significant amount of the exceptional items, due to Uniphoenix's inability to collect debts owing to its stock broking division. One reason why Uniphoenix's debt ballooned to such a massive amount was due to the group's aggressive activities in margin financing. It became clear that Uniphoenix's survival lies in restructuring its debts. The group entered into a restructuring exercise where a new entity, Profie Corporation S/B (Profie) will acquire Uniphoenix on the basis of 30 Uniphoenix shares for 1 Profie share. Unfortunately, the scheme was aborted in 22 Dec 2000. As such, the group was deemed an affected issuer pursuant to PN4/2001 on Feb 2001.

Table 2 : Exceptional loss in 1998 (RM mln)

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