Category: General

Aker's raid on Aker Solutions

I hope everyone has had a nice Easter, I know I've had; recharging my batteries, so to speak, and gotten some sun. But one case in particular has preoccupied me for the past couple of weeks, so I can might as well share some of my thoughts on the matter.

The summary of the situation is that Aker Solutions acquired ownership in a series of companies from the holding company Aker. Internal transactions are always vulnerable to speculations about proper pricing, and stresses the importance of proper Corporate Governance. For one thing the competencies and the independence of the different corporate boards of directors can result in the difference between a favorable and an unfavorable situation.  My hypothesis is that the board of directors in Aker Solutions is too closely related to the Aker system. Simultanuously you have a complicating factor in that the Norwegian government is involved. The Norwegian Prime Minister was present at the Aker Day 2nd of April when the transactions were announced, and naturally got questioned about his thoughts on the matter. More about that later.

Aker

Aker ASA is an industrial ownership company consisting of the companies (ownership in percentages after adjusting for the transactions in question)

  • Aker Floating Production (72.3%)
  • Aker Drilling (100%)
  • Aker Solutions (41.0%)
  • Aker BioMarine (82.9%)
  • Aker Seafoods (64.95%)
  • Aker Exploration (76.1%)
  • Aker Philadelphia Shipyard (50.3%)
  • Aker Clean Carbon (50%)

The aker companies has a total of 26,500 employees spread across five continents and total operating revenues totaling NOK 65 billion for 2008.

Aker Solutions

Aker Solutions delivers engineering, construction, manufacturing, technology products, maintenance and other specialised services, often as total solutions for complete projects. Aker Kværner is the result of a merger between the Kværner Group and the Aker Maritime Group in 2002, and it got listed on the Oslo Stock Exchange in 2004. In April 2008, Aker Kværner changed the name to Aker Solutions.

Governmental involvement / Aker Holding

Aker Solutions’ largest shareholder is Aker Holding AS, with a 40.27 percent stake in the company. Aker Holding AS is owned by Aker ASA
(60 percent), the Norwegian Government (30 percent), SAAB AB (7.5 percent) and Investor AB (2.5 percent). The government got involved on June 22nd 2007, when Aker transferred its entire ownership of Aker Solution (40.27 %) to Aker Holding, and sold 40% of the latter for NOK 6.4 bn. This happened after international investors showed interest in the company, by reasons of wanting the company to remain in Norway. As this is not a post about protectionism I'll leave it at that for now. There are also questions about a put option that was given to the swedish investors, but again, I'll leave that for now.

The transactions

Aker Solutions is acquiring five companies at a total consideration of NOKbn 2 including shareholder loans (ownership in brackets):

  • Aker Oilfield Services (100%)
  • ODIM (33%)
  • Aker DOF Supply (50%)
  • Misund Bruk (100%)
  • Aker Clean Carbon (50%)

It is worth noticing that a few of these companies undoubtedly prompts sound long-term gains for Aker Solution. The issue is the pricing involved. At the same time it seems weird to increase the capital expenditure requirements for the next couple of years by roughly NOK 2.5 bn and the debt ratio (NOK 2 bn in debt accounts for roughly 25% increase) in the mids of the financial environment we're in.

One company that seems additive for Aker Solution is the acquisition of Aker Oilfield Services, but while the valuation of comparables are down 50-90% over the past 18 months, the transaction involved a premium to prices at that point, which seems unreasonable at best. Similarly the ODIM stake seems just, except for being sold for a 16% premium over closing prices on the Oslo Stock Exchange previous day. The transfer of Aker DOF Supply (pretty much 6 AHTS (Anker Handling Tug Supply) ships) is more questionable.

The acquisition of Aker Clean Carbon is also interesting, as Aker Solution sold this to Aker in the first place and now pays a premium in order for it to be re-acquired. But the most questionable in the whole situation is the process.

The Aker value statement says "Aker ASA’s overriding concern is to create value via its ownership of well-run businesses that provide products and services in an environmentally sound, ethical, and socially responsible manner.", an interesting notion considering the situation in the first place.

Aker Solutions had a general assembly 1st of April 2009. Nothing about these transactions, however, were mentioned untill the Aker Day the 2nd of April. For transactions resulting in 25% increase in debt and capex increases it would've been nice for this to be mentioned in the documents for the general assembly, not to mention for it to be disclosed at this, not the following day.

As for Aker Holding, the equity agreement between the partners states that such a transaction in Aker Solution ASA is clearly a matter for the board of Aker Holding and the general assembly. However, the transactions were performed through a fully-owned subsidary of Aker Solution ASA named Aker Solution AS (note the difference in organization form, so it is actually two different companies).

Inquery into the transactions

The government has started an inquery into the transactions. The financial valuation will be performed by Pareto Securities, while the legalities will be considered by the lawfirms Simonsen and Selmer. The question is, what can happen even if they should conclude things to be non-favorable for Aker Solutions? Ultimately the responsibility is with the board of directors in the company.  The government's representative in the Aker Holding board is now responsible for the investigation, after apparently reacting due to the stock market reaction to the news.

akso

As one can see in the drop the past couple of days, it is down (rougly 13% the days directly after the announcement), on a montly basis it is down about 11% vs OBX (25 most traded shares on OSE, of which AKSO consists) which the past month is up 4.36%. The increased debt ratio and capex has also resulted in rating agencies taking matters into their own hands and prompting a negative watch on the rating (BBB- initially)

No matter what happens, it shows the importance of corporate governance when dealing with internal transactions, it will be interesting to see what the inquery concludes.

NOK the new safe haven?

Investors are currently searching for a new safe haven currency as the USDs position is being questioned due to the strain on the US economy and the resulting stimulus packages. At the same time the Swiss Central Bank is getting worried about the export industry and has announced the probability of interventions to weaken CHF.

There have been some statements lately about the Norwegian Krone (NOK) being positioned as an alternative new safe haven. In particular David Bloom from HSBC has claimed that the NOK is the "ultimate haven currency", and that "It's probably the best currency in the world." noting that Norway's economy grew by 1.3% in Q4 and was not forecasted to experience as big a downturn as other economies this year. Norway's monetary policy was also NOK supportive, like other commodity-producing countries and it is not expected to resort to quantitative easing policy to boost inflation expectations.

This view has some support, in e.g. that the cost of insuring against sovereign default in Norway through credit default swaps is the lowest among the countries with the ten most traded currencies.

At the same time there are several arguments against the NOK being a new safe heaven currency. Gavin Friend at NAB Capital agrees the krone appears one of the best of a bad lot, with a healthy current account balance and interest rates likely to lend it support. But he says: "You are trying to win the least ugly currency contest at the moment. I can't disagree that it might move higher, but I can't get too enthusiastic." His main concerns are the lack of liquidity in the market and the krone's long-held correlation with oil prices.

If we look at a chart of the NOK vs the USD we see the large shifts of NOK as investors pulled money away from it during the credit crunch, as NOK traditionally has been considered a somewhat emerging market economy.

Ashraf Laidi at CMC Markets says the fact that the krone fell against both the dollar and the euro during the turbulence following the collapse of Lehman Brothers in September means it cannot really be called a haven currency.

Another argument is that Norway, similar to Switzerland is dependant on export, so that the Norwegian Central Bank will most likely intervene if NOK appreciates too much relative to others currencies.

Granted the safe-heaven status is more about low volatility than it being strong per se, and it could be argued that Norway has higher chances of intervening than most other countries, amongst others because of the Norwegian Government Pension Fund - International, and that the high volatility we've seen in the past doesn't necessarily limit a lower volatility forwards if the situation is managed properly by the Norwegian CB. But this would require a shift in the school of thought.

But if NOK won't be the new safe currency, what will be? Gold is an obvious traditional placement. At the same time the Chinese economy can be an interesting argument for Chinese, or other Asian, currencies.

The only thing that is certain is that we're facing an interesting situation, and it will be interesting to see how the situation continues to play out.

Funny diversification

Who says investment can't be plain fun? The Norwegian financial newspaper Finansavisen brought up a new asset class that can be fun to diversify into[1], the world of models. In short we're talking venture capital by funding the start of a new modeling career.

The opportunity is provided by the modeling beuro Beauty Holding Ltd (hereafter BHL) [2], that started up in June of this year. The company, registered in the tax heaven Jersey, is founded by former top model Ingrid Devatova.

What is interesting is the risk/return evaluation, as you can purchase and sell shares in the models at any time until they reach the goal of $10,000, at which point the modeling company organizes photo-shoots in Paris and London. The returns of the first year is then shared 50/50 between the model and the sponsors. The 50% that goes to the sponsors is then distributed according to the buy-in , so that an $100 investment gives 1% of the return dedicated to sponsors (as total is $10,000).

Herein, however, also lies an obstacle. As the additional risk of investing early does not give a greater pay-off than investing late, one is really incentivized to wait till a model approaches the $10,000 before going in with anything. One thing that could be helpful in order to increase investments would have been to separate the payoff into trenches.

exempli gratia such that investment $0-1000 gets 12-15% of the payoff rather than just 10%, the next 1000-5000 gets a somewhat less share than that again, and the last 5000 gets slightly less than the respective percentage handed out today.

One thing that speaks in favor of today's system is the ability to sell shares at any time, and as such you can re-allocate whenever someone approaches the threshold level, but it still doesn't provide incentive to invest early.

Note that the numbers above are completely arbitrary, and the actual division would have to be based on an empirical analysis of returns as well as the amount of time it takes to reach the different levels in any such system.

As this asset class is not correlated (less correlated) with bonds and equity markets, it provides a fun way to spend pocket-money and masquerade it as diversification into a new asset class. And one gets responses from the different assets (girls) on the message board as time goes with updates and greetings.

For BHL it is also profitable, as they don't pay out anything until the assets reaches $10,000. The costs are not covered by the company, so in theory they can just put the money into interest-bearing papers and collect the interests, or build a more risky portfolio to increase the returns even more. Granted this can provide incentive for the company NOT to consider any trenching system in order to give quicker funding, a good example of principal/agent costs in finance.

If you want to read more about this scheme, visit beautyholding.com and check it out yourself. It can be quite a lot more fun than just looking at numbers all day 🙂

[1] Finansavisen,23. august 2008, pages 40-41
[2] http://www.beautyholding.com/