AusGroup Limited - Why is it paying S$55 mln to acquire net liabilities from Ezion?

30/8/2014 – AusGroup Ltd is buying the Port and Marine Base business from its controlling shareholder SGX-listed Ezion Holdings Ltd for S$55 mln.

This business falls under the umbrella of wholly-owned subsidiary Ezion Offshore Logistics Hub Pte Ltd (EOLH) and 90%-owned Teras Australia Pty Ltd (TAPL).

The acquisition is conditional upon the approval of AusGroup's shareholders at an EGM.

The deal price of S$55 mln was based on an independent valuation report, prepared by Stone Forest Corporate Advisory Pte Ltd on July 10.

AusGroup will pay S$14 mln in cash and issue 92,155,541 new shares to settle the remaining S$41 mln.

Ezion has also agreed not to compete with AusGroup in businesses similar to EOLH and TAPL for three years from the date of completion of the disposal.

EOLH is an investment holding company with a paid-up and issued share capital of S$100,000.

It has two direct subsidiaries, namely Ezion Offshore Logistics Hub (Tiwi) Pty Ltd (EOLH Tiwi) and Ezion Offshore Logistics Hub (Exmouth) Pty Ltd (EOLH Exmouth).

EOLH Tiwi further has a subsidiary namely, Indigenous Marine Logistics Pty Ltd (IML).

EOLH Exmouth and IML are dormant subsidiaries.

According to Ezion's announcement, EOLH Tiwi is "Engaged in the business of operating a port and a marine supply base providing, inter alia, administrative, storage and logistics support to various vessels, including those from oil and gas projects in the region[.] However, EOLH Tiwi is still in the process [of] setting up the port and the marine supply base and has yet to fully commence operations."

Ezion's 90%-owned subsidiary Teras Australia Pty Ltd (TAPL) has an issued and paid-up share capital of A$1.25 mln.

According to Ezion's announcement, TAPL 'provides ship chartering services and maritime training to indigenous workers in Australia.'

The remaining 10% stake in TAPL is owned by Aboriginal Maritime Pty Ltd (AML).

Last year, Ezion bought a 20% stake in AML.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Why is it paying S$55 mln to acquire net liabilities of Ezion?

According to AusGroup's announcement (page 3), EOLH and TAPL had a negative book value of S$13.7 mln on June 30.

The negative book value was due to accumulated losses of EOLH and TAPL.

EOLH and TAPL recorded a net loss of S$7.2 mln in FY14 ended June 30.

AusGroup said that the losses were due to 'start-up and administrative costs' of EOLH Tiwi, which is yet to commence its operations.

It is perplexing that EOLH and TAPL have been valued at S$55 mln, even though they had net liabilities of S$13.7 mln on June 30.

Question

2. How did the valuation of Ezion's Port and Marine Business increase to S$55 mln from just S$100,000 a few months ago?

EOLH Tiwi is the only company which apparently seems to own some significant assets.

DMG & Partners' July 23 research report says Ezion's marine base business is the only gazetted international port in northern Australia capable of serving the local oil & gas industry.

The broker only expects the port to generate significant revenues and earnings in 2016/17.

However, it is not the first time Ezion is trying to sell its Australian Port and Marine business.

On September 30 last year, Ezion announced that it had agreed to sell EOLH Tiwi to SGX-listed Ocean Sky International Ltd for S$100,000, arrived at on "an arm’s length and willing-buyer and willing-seller basis."

According to the announcement, EOLH Tiwi had net liabilities of A$3.8 mln on June 30 last year.

At the same time, on September 30, Ezion also agreed to acquire a 45.15% stake in Ocean Sky International by subscribing new shares in its capital.

However, on February 12, Ezion and Ocean Sky International terminated the deal as SGX viewed the arrangement as a 'reverse takeover'.

Long story short, we wonder why EOLH Tiwi should be worth millions now when it was worth just S$100,000 a few months ago.

What has changed between September 30 and July 22?

What made Stone Forest Corporate Advisory Pte Ltd value EOLH and TAPL at S$55 mln?

AusGroup says a copy of the valuation report is available for inspection at its registered office at 36 Tuas Road, Singapore for a period of three months.

However, when we visited on August 19 the receptionist had no idea what report we were asking for.

A colleague was also unable to help, until one suggested we contact the Australia-based CFO Gerard Hutchinson.

We emailed him asking for the report, to which he replied after this story was first published, as follows:

"As part of our Circular to Shareholders, we will make the documentation available but this is still pending IFA report to Independent Directors and SGX in-principle approval. Following those events, we will make all information available, but up until then the information is Commercial in Confidence of Ezion.

We trust this is understandable, but we have to ensure market updated at the same time."

Total number of questions in the full story: 4)

We have invited the company (info@agc-ausgroup.com) to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do.

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