Abu Dhabi Capital Management (ADCM) arrived on the scene nearly a decade ago. It started as a secondary Private Equity (PE) investor, scooping up interests in regional PE funds from panicked sellers in 2010. The interests included Limited Partner (LP) stakes in funds managed by the likes of Abraaj, Arcapita and Global Investment House.

In 2013 ADCM went on to establish a fund named the Goldilocks Fund (Goldilocks).

Goldilocks

The fund was the first in the Middle East to pursue a shareholder activist strategy. It would invest in what it regarded as undervalued stocks of companies where there was scope to engage with the board or management to unlock shareholder value. It was the expectation that the market would subsequently re-rate the stock price higher. As the asset manager, ADCM would charge investors in the Goldilocks Fund a 1.5% management fee and 15% on all gains. Having raised around USD 200mn, Goldilocks went on the hunt for targets.

Over the following couple of years, Goldilocks was active in several Middle East companies, including Gulf Navigation, Eshraq, Waha Capital, Dana Gas and GFH. In 2017 Goldilocks went further afield and headed east.

Noble Group

Noble Group Limited (Noble) was founded in Hong Kong in 1987 by serial commodities entrepreneur Richard Elman. The firm grew to be one of the world’s largest suppliers of many essential raw materials. Noble not only traded but also built supply chains for consumers of commodities from grains and sugars, to energy and steel. After a decade of operating, the firm went public on the Singapore Stock Exchange.

Between 2012 and 2016 Noble Group was run by a former Goldman Sachs partner from Bahrain, Yusuf Alireza. The firm had aspirations to be the Glencore of Asia. Instead, it had fallen on hard times as a result of largely excessive debt and a weakening operating environment, compounded by a massive collapse in commodity prices in 2014.

The situation spiraled out of control in February 2015 when a little known firm named Iceberg Research questioned the integrity of Noble’s accounts, causing the stock to fall by over 60%.

Struggling with a shareholder revolt and mounting losses, in May 2017 Noble announced a strategic review. As part of the review, Noble hired Moelis & Company and Morgan Stanley to assist with options to sell and liquidate subsidiaries and reschedule its debts in an effort to keep the business a going concern.

One of the imminent threats Noble faced was a USD 400 million borrowing facility with a coupon due on 26th June 2017. Just six days earlier on the 20th June 2017 it announced that it had managed to defer the payment and extend the facility for a further 120 days, buying it some breathing room to continue with planned asset sales to improve its liquidity.

 

The Porridge

In late June, Goldilocks made a public filing with the Singapore Stock Exchange, disclosing they had acquired a substantial stake in struggling Noble.

Goldilocks had accumulated a total of 66 million shares in Noble, crossing the 5% substantial shareholder threshold. A few weeks later on the 10th July Goldilocks disclosed that it had increased its holdings to 107.5mn shares, or 8.1 % of the company.

In summary,

20th June,

acquired 66,000,000 shares, for SGD 30,712,984 (~ USD 22.1mn)

6th July,

acquired 41,564,500 shares, for SGD 23,234,555 (~ USD 16.7mn)

Total consideration SGD 53,947,539 (~ USD 38.8mn) or an average entry price of SGD 0.50 per share.

The chart below illustrates when the position was acquired during the summer of 2017.

The rest of 2017 saw Noble sell subsidiaries, consolidate some of its holdings and struggle to renegotiate the terms of its debt. It also saw ADCM and the Goldilocks team engage in their first high-profile attempt at shareholder activism on a company listed outside of the Middle East.

A re-based chart below highlights Goldilocks’ entry point. The stock continued to fall well into 2018, racking up losses in excess of 80% for the fund.

We take a look at what happened in a chronological summary below.

 

The Bears

29th January 2018

The Noble board announced an “in principle” agreement with some of the group’s senior creditors known as the “Ad Hoc Group”. The Ad Hoc Group in aggregate represented around 30% of Noble’s existing senior debt, a total of USD 3.45bn. The agreement involved creating a new holding company “Topco” with existing Senior creditors owning 70%, Management 20% and existing shareholders 10%.

The proposal was subject to final details, regulatory and of course shareholder approval.

Hypothetically, if the restructuring terms were accepted and Noble shares remained at their SGD 0.26 closing price for the day, Goldilocks would have faced a total loss of 95% on its investment.

 

30th January 2018

An article titled Noble’s restructuring plan leaves major shareholder Goldilocks upset was published in Singapore’s The Business Times and signaled a flurry of subsequent events. The article detailed a variety of allegations raised by Goldilocks and a minority investor advocacy group Securities Investors Association Singapore (SIAS) against Noble and its management. One of the key complaints was that in the proposed restructuring, management would receive 20% of the new equity in Topco.

 

31st January 2018

Noble has a board that comprises 7 directors, 5 of whom are non-executive.  Noble responded with a statement denying all allegations outlined in the letter from Goldilocks to the Singapore Exchange. Specifically, Noble defended management’s proposed equity share and the firm’s reluctance to immediately give Goldilocks 2 board seats.

The allegations that Management are enriching themselves at the expense of shareholders are unfounded. Management are essential to the Company’s business because its core businesses are “people businesses”. In order to retain Management and align its interests with the future success of the Company, the Ad Hoc Creditor Group during restructuring negotiations agreed to a 10% interest to Management initially. Any further grants will be subject to performance hurdles, will not vest if those hurdles are not achieved, and will be funded by loans from creditors that will need to be repaid before vesting.

The Board would also explain that Goldilocks purchased its shares in the secondary market unsolicited, and without any consultation or engagement with the Company. The Board welcomed their support, and subsequent initial private engagements (which were subject to non-disclosure arrangements) that had followed with them had been very encouraging. However, Goldilocks made it a precondition of any detailed talks over any potential restructuring or investment options, that they be immediately granted two Board seats. The Board’s Nomination Committee met to consider this request and was not comfortable acceding to this request, for corporate governance reasons. This was carefully explained to Goldilocks. Nevertheless, the Company had continued to engage with Goldilocks and they have had meetings with advisors to the restructuring and have received detailed briefings, again subject to non-disclosure arrangements.

 

5th February 2018

Noble made an announcement that reflected a change of heart by the SIAS, confirming Noble was operating ethically and fairly with regards to minority shareholders.

As tensions rose between Goldilocks and Noble, the company’s stock resumed its downtrend. It fell from an interim peak of SGD 0.31 on the 25th January 2018 to new lows of SGD 0.05 by June, or -84%.

 

14th March 2018

Noble came to believe that a debt restructuring was the only solution to its problems, and announced that the Restructuring Support Agreement (RSA) had been signed with the Ad Hoc Group of senior creditors which included Deutsche Bank and ING Bank. A debt restructuring appeared The terms agreed reflected the existing terms that Goldilocks had refused.

Management SPV and shareholders will be offered equivalent terms, which are as follows:

– 10% of common equity in New Noble will be granted to current shareholders, while Senior Creditor SPV will grant 10% of common equity to Management SPV, both upon completion of the proposed financial restructuring.

– Management SPV has an option (the “Option”) to acquire 10% of common equity from Senior Creditor SPV and will make 50% of the Option available to the then prevailing shareholders of New Noble from time to time (on a pro rata basis excluding Management SPV and Senior Creditor SPV). The Option will be exercisable in stages within the period of five years commencing on the effective date of the Restructuring, at an exercise price per share corresponding to an aggregate exercise price for all the shares under the Option of US$85 million (payable in cash or cash settled).

 

21st March 2018

A Bloomberg story was published detailing a lawsuit filed by Goldilocks against Noble. That afternoon, Noble announced they received notice from Goldilocks of the lawsuit brought against them, concerning…

amounts paid by the Company [Noble] to certain named officers of the Company as part of their remuneration packages, as well as leave to commence a derivative action against these officers for alleged breaches of fiduciary or equitable duties owed to the Company.

The following day regulatory filings showed several large shareholders reduced their holdings in Noble.

 

18th April 2018

Noble Chairman, Paul Brough, made an announcement seeking urgent support of stakeholders in the restructuring process. He went on to highlight that the group was in default on USD 379mn of bonds that were due that Friday.

 

20th April 2018

Noble disclosed that Goldilocks sent a letter requesting permission to nominate five non-executive directors to the board at the company’s upcoming AGM. Recall that Goldilocks held just 8.1% of the company and assuming no new board seats were created, taking 5 out of the 7 seats would be the equivalent of 71% of the company’s representation.

 

23rd April 2018

Noble disclosed details of the letter send by Goldilocks, mentioning the names of the five proposed directors, of which the first two were directly affiliated with ADCM.

  1. Ajit Vijay Joshi
  2. Bachir Nawar
  3. Khoo Song Koon
  4. Chow Wai San
  5. Lim Yu Neng Paul

Noble summarized that Goldilocks held just 8.1% of Noble’s equity. Noble went on to flag that Goldilock’s request was rejected as they failed to submit in a manner that was legally compliant. Noble ended the notice with “Given the recent dialogue, the Board is surprised that the Notice and the Request were issued and signed in Goldilocks’ name thereby rendering them invalid.” It appeared that the procedure taken to submit the board nominations was invalid, raising the question of whether ADCM had an adequate legal team supporting their activist investment strategy.

 

26th April 2018

Noble made a statement regarding the claims brought against it by Goldilocks in the Singapore High Court, emphasis ours.

“The Company [Noble] is of the view that each of the Claims have the same substance and intent as GICL’s [Goldilocks] earlier claim filed with the Court on 20 March 2018 (Case No.: HC/S 295/2018) in that each Claim is devoid of merit, materially deficient as to matters of applicable law, are factually inaccurate and are intended to cause the greatest amount of harm to the Company’s Restructuring process in the shortest period of time as GICL does not agree with the views of over 83% of the Company’s creditors and its largest shareholder, who have signed the RSA and support the Restructuring.

However, since the date of the RSA, neither the Company nor the Ad Hoc Group have received from GICL a revised, credible proposal which is capable of implementation for any: (i) alternative restructuring solution; or (ii) refinancing / ‘White Knight’ proposal from itself or other third parties – GICL’s statements to the contrary are a mischaracterisation of the communications between the Company and GICL since such date. The Board is disappointed to see a once open dialogue with GICL deteriorate to a point where the only matter ‘put’ to the Company by GICL since such date are the litigation Claims referred to above and the multiple allegations released publicly.

Why hadn’t Goldilocks hadn’t proposed an alternative restructuring plan?

Shareholder activism as championed by the likes of industry veterans Carl Icahn, Trian Partners, Third Point and Pershing Square, typically entails open letters, publicly published alternative courses of action and plenty of media coverage.

Goldilocks in this case, other than a few discrete interviews, had done none of the things expected of a successful activist.

In another blow, Noble founder, Richard Elman, who still controlled 18% of the company’s stock notified Noble that Goldilocks’ view didn’t reflect his own, and that of several other substantial shareholders.

Mr. Elman continues to support the proposed restructuring. He has not seen any detailed proposals from Goldilocks, or any other party, that can be considered even remotely credible in ensuring a financial return to shareholders.

Later that day renowned restructuring specialist Houlihan Lokey chimed in, representing the group of creditors collectively known as the Ad Hoc Group.

… the board of directors (the “Board”) should proceed to implement the Restructuring in accordance with the terms of the RSA, and should not be deterred from that course of action by the abusive proceedings that Goldilocks Investment Company Limited (“Goldilocks”) has brought in the Singapore courts today.

At this point it’s safe to question whether Goldilocks was in over its head. This was its first multi-billion dollar debt restructuring in a foreign jurisdiction and it wasn’t going well.

Furthermore, Goldilocks was an equity holder with a non-controlling stake and no board seat. At this stage it was  increasingly clear that any restructuring would favor creditors, at the expense of shareholders. They had arrived at the gun fight holding a knife. Having already lost over 80%, Goldilocks was certainly not enjoy her porridge.

 

29th April 2018

Noble announced that the court has thrown out Goldilock’s demands.

 

20th June 2018

In an appeasement of sorts, Noble announced an update on the restructuring, including concessions to existing shareholders. We presume there had been ongoing discussions behind the scenes between Goldilocks and Noble.

Shareholders to receive an increased share of 20% of the equity in New Noble.

  • Goldilocks provides irrevocable undertaking to support the financial restructuring, entitled to nominate one director to the New Noble board of directors
  • Mutually advantageous Middle East strategic partnership to be formed with an affiliate of Abu Dhabi Financial Group
  • Noble and Goldilocks to discontinue all claims and proceedings on a no-fault basis
  • Resolution enables Noble to move into the final stages of the Restructuring

Paul Brough stated “We are pleased to have secured Goldilocks’ support for the Restructuring. The Strategic Partnership Agreement announced today will create real opportunities for New Noble in the Middle East.

The updated restructuring includes details of the Middle East Strategic Partnership with Abu Dhabi Financial Group, the parent entity of ADCM, via a new entity to be created named ADCM Resources.

The Strategic Partnership Agreement will be for an initial term of four years and may be extended by mutual agreement for an additional four years on terms to be mutually agreed at the end of the initial four-year term.

In consideration for the services to be provided by ADCM Resources pursuant to the Strategic Partnership Agreement, ADCM Resources shall be entitled to: (i) a fee of US$3.5 million in respect of the initial four year term; (ii) an annual payment of 5% of the net profits derived from sales generated as a result of the services provided by ADCM Resources with respect to new business (“Net Profits”); and (iii) following the Restructuring Effective Date, further payments of US$750,000 on each of the earlier of (a) Net Profits reaching US$5 million or 20 December 2018 and (b) Net Profits reaching US$10 million or 20 December 2019.

 

Outcome

As of Friday 9th November, Noble’s share price closed at SGD 0.089. Goldilocks’ average entry price was SGD 0.50.

Goldilock’s USD 38.8mn investment is now worth USD 6.9mn – effectively a -82% loss.

However ADCM managed to secure some offsetting concessions which total as follows:

  1. USD 3.5mn fee paid over 4 years.
  2. 5% of annual net profits of ADCM Resources
  3. Two USD 750,000 payments in December 2018 and December 2019

Only 1. and 3. are tangible today, and total USD 5mn. If we add that to the USD 6.9mn carrying value today we get USD 11.9mn. This amounts to a net loss of -69%, which is better than the initial -82% but still significant.

Questions

  1. Did Goldlock’s manager, ADCM, have the experience and resources to pursue this activist trade?
  2. What “edge” did ADCM believe it possessed, given Goldilocks controlled just 8.1% of Noble, as a minority (not even the largest minority) with no sway over the board?
  3. Why did ADCM make critical mistakes in its process of requesting board positions?
  4. Did ADCM have any dialogue with founder and 18% shareholder Richard Elman before approaching the company? If not, why?
  5. Where was ADCM’s turnaround plan? Why was it never submitted to Noble or publicized?

In closing, we’d like to highlight the following Bloomberg story detailing how renown activist Paul Singer clipped the wings of Israel’s billionaire tycoons that used and abused its public markets for decades.

With so much chicanery in Middle East markets, the opportunity set at home appears ripe for the well capitalized and thick skinned.