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17 Oct 06
Temasek Holdings of Singapore has found itself in a big mess with the Shin Corp deal because its leaders naively believed that Thaksin Shinawatra was a person with whom they could do business.
Lee Kuan Yew, the patriarch of Singapore, is believed to have played an important role in convincing his son, Prime Minister Lee Hsien Loong and daughter-in-law, Madame Ho Ching, that Thaksin was a sure bet because of his strong grip on power, according to a well-informed financial source.
Thaksin was a recipient of Lee senior’s leadership award. And he was seen as the kind of person Singaporeans could do a deal with.
When Ho Ching, who is chief executive of Temasek, decided to buy into Shin Corp last year, she did not insist on Temasek’s financial adviser, in this case Goldman Sachs, conducting a due diligence investigation into the Thai company, then owned by the Shinawatra family.
Due diligence is normal procedure for a prudent investor, often going beyond a company’s solvency and assets and probing civil and criminal litigation matters, conflicts of interest, insider trading and press and public records that identify problems with a target company.
Temasek was assured that, with Thaksin in power, all legal obligations and any problems arising from buying into Shin would be taken care of. The takeover was struck on a personal basis.
Shin Corp chairman Boonklee Plangsiri distanced himself from the deal from the outset, claiming that management was not aware of any discussions of a takeover, right up to the point when the deal was announced. In short, it was a private affair of the shareholders – the Shinawatra and Damapong families.
Temasek also failed to consult Singapore’s Foreign Ministry or its Embassy in Bangkok about the political ramifications or risks that could be associated with the deal.
Temasek was certain it had hooked a big fish because it had been able to involve Chumpol Na Lamlieng, the chairman of Singapore Telecom and former president of Siam Cement, in the Shin deal. It had also been able to involve the Siam Commercial Bank and SCB Securities Co, to bankroll the deal and provide financial advisory services, respectively.
Most important of all, it believed that Thaksin’s political stature was unchallenged.
Without due diligence, Temasek was not aware – or if it had been aware, no-one cared – that the Thai prime minister’s family and the Damapongs would pay no tax at all on the Bt73.3 billion they would receive from selling their 49 per cent stake in Shin Corp.
Initially, Temasek only wanted to buy Advanced Info Service, the mobile phone operator. But the Shinawatras were only interested in selling the whole package, which meant Temasek had to buy Shin Corp.
When the deal was announced on January 23, it set in motion the eventual downfall of Thaksin and his Thai Rak Thai Party. The Thai public, particularly the middle-class and intellectuals, were outraged that the prime minister’s family paid no tax at all.
The Shinawatras were accused of selling off the country to Singapore by handing over national concessions such as mobile phone, satellite and TV businesses to Temasek.
Media tycoon Sonthi Limthongkul, who began staging rallies to oust Thaksin before the deal was announced, would have run out of steam had the Shin takeover not occurred and given him a heap of fresh ammunition with which to attack the PM. Soon, Sonthi’s public support grew further when he linked up with the People’s Alliance for Democracy.
The matter did not end there. Temasek was later found to have relied on nominees to acquire business interests considered to have national security implications. Thai business law prohibits foreign companies owning more than 50 per cent of a telecom business. Because Temasek was obliged to tender for 100 per cent of Shin, it had to pay around Bt140 billion to acquire about 96 per cent of the company. So it set up a complex web of firms to buy into Shin Corp.
There were rumours in the financial markets that Temasek might have paid the Shinawatras and Damapongs a portion in cash and deposited the rest in an escrow account, so that if something went wrong with the deal, it could get the money back. But the rumours proved to be unfounded. The transaction had to be conducted in cash because it was done through the Stock Exchange of Thailand and brokers representing both the buyer and sellers.
But a financial source said there would certainly be a clause of “representation warranty” in the purchase contract. This means that if any subsidiaries of Shin, which is a holding company, face damage from any legal obligations, the buyer – in this case Temasek – has the right to sue the seller to reclaim the damage.
Soon after the deal, iTV, a subsidiary of Shin, ran into trouble with the Office of the Prime Minister over its payment of concession fees, and was ordered to pay Bt77 billion in compensation.
Nobody is sure yet whether Temasek will sue the Shinawatras if it faces financial damage from events involving the Shin Corp subsidiaries.
However, the Commerce Ministry’s department of business registration has found that Kularb Kaew – one of the companies used by Temasek to buy into Shin – is a nominee firm.
The Commerce Ministry, under Somkid Jatusripitak, tried to sit on the issue, hoping to buy time until after an election scheduled originally for this month, but which never came to pass. The Commerce Ministry then sought to buy further time by expanding its investigation to include 16 other companies suspected of relying on nominees to circumvent Thai foreign ownership laws.
But the coup has completely changed the political landscape. Thaksin has been booted out, and Temasek can no longer sweep the problems from its acquisition under the carpet.
The latest news suggests Ho Ching is ready to strike a compromise by doing whatever is needed to end controversy surrounding the deal. Even if Temasek has to pay a fine or reduce its stake in Shin to conform with Thai law, it is willing to do so. Temasek has already lost US$800 million in book value from its acquisition of Shin.
If it is forced to reduce its stake to below 50 per cent, it will have to find Thai funds or companies to buy its divested shares. Then it will be able to figure out the extent of its steep losses from its Thai expedition.
The Shin Corp deal has received little coverage in the Singapore press. But already, Singaporeans are beginning to ask: “What went wrong with Temasek and the Shin Corp deal”?