Did Ezra Holdings Ltd Just Bail Out EMAS Offshore Ltd From Trouble?

EMAS Offshore Ltd (SGX: UQ4) announced on 16 December 2015 that it will be selling off its 12.13% stake in Bursa-listed Perisai Petroleum Teknologi Berhad (KLSE:0047.KL), an upstream oil & gas service provider.

Due to the falling price of oil, Perisai Petroleum has been hammered badly in the stock market over the past year – its share price has fallen from a peak of RM0.725 per share in February to a level of RM0.28 just prior to the aforementioned sale announcement.

EMAS Offshore  is not in a very healthy state itself as it is looking to sell its investment to help repair its balance sheet. So, who is buying EMAS Offshore’s Perisai Petroleum shares?

Unsurprisingly, it is Ezra Holdings Limited  (SGX: 5DN), the parent company of EMAS Offshore through its 75.25% stake, that has come to the rescue. Ezra Holdings has agreed to pay US$56 million for EMAS Offshore’s 12.13% stake in Perisai Petroleum, which is a 500% premium from the market value of the shares. Is this a bailout of EMAS Offshore by Ezra Holdings?

Looks like it

EMAS Offshore is currently sitting in a dangerous position. Its gross margin has fallen to negative territory in its latest quarter and it has a net debt to equity ratio of 127% as at 31 August 2015. The company also has more than US$200 million in short-term debt due soon to worry about.

At Perisai Petroleum’s current market value, EMAS Offshore’s stake is only worth about US$11 million. And yet, Ezra Holdings’ is offering such a high premium for the deal, as mentioned earlier.  According to EMAS Offshore’s announcement, “The price has been determined based on the cost of EMAS’ investment at inception. The purpose of this transaction is to consolidate the interest in Perisai in a single entity at Ezra level.”

That reasoning does not make any sense to me. Even if EMAS Offshore had made an investment at a much higher cost, the company should suffer the losses if it has made a bad bet. Why should Ezra Holdings’ shareholders pay for the mistakes that EMAS Offshore have committed?

It’s worth bearing in mind that Ezra Holdings’ balance sheet is not looking too good as well. The company had a net debt to equity ratio of 99% as at 31 August 2015. In my view, by buying an asset at an inflated price in the hopes of saving its listed subsidiary, Ezra Holdings’ management is essentially transferring risk from EMAS Offshore directly onto itself.

For me, this deal shows much about how the management of Ezra Holdings treats the firm’s minority investors. The management of Ezra Holdings is disregarding the interest of its minority shareholders and publically bailing out its listed subsidiary and their shareholders. In turn, it would be Ezra Holdings’ shareholders who would be the ones left holding the bag.

The deal is not completed yet as EMAS Offshore has until 31 December 2016 to sell its stake in Perisai Petroleum to Ezra Holdings.

But in any case, the deal raises a question: After this, would Ezra Holdings’ minority shareholders be willing to step up and save the firm if it has difficulties repaying over US$700 million in debt that are due, or can be recalled at any time, within the 12 month period from 31 August 2015 to 31 August 2016?

I’m not a shareholder. But if I am, my response to the question above would be: Fool me once, shame on you. Fool me twice, shame on me.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own shares in any companies mentioned above.