Category: Politics

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.

The fall and decline of USA and the USD

It has been quite some time since I've written anything in this blog, primarily for two reasons:

  • I've been too busy with everything else
  • I really haven't had that much on my mind that was worth writing about

But today I felt different, so here we go with my little rant, hopefully there will be some comments to it.

USD keeps depreciating against the Norwegian Krone (NOK). We have had a 2.26% depreciation the past two days and USDNOK is now trading at 5.1899. If we look at monthly data we see that NOK gradually has appreciated since 2002, when USDNOK was at levels above 9. It passed the 1992-high of 5.20 in august 2007 and is now trading around 5.19. This marks a 46% appreciation which, I believe, most will agree with is a massive movement.

I have no doubt that we will see USDNOK continuing to decline, and we'll see the 4-number before or during 2009. I speculate that after this; presuming the US can get its act together, we'll see normalization around 2013-2015 at a 6-7-range. But we'll see if time proves me wrong or right on that one.

One thing is certain. with EURUSD at 1.5, with expectations to reach 2 by 2010-2011, USA loses international purchasing power. The upside obviously being gaining competitive strength again.

And being competitive internationally is something the US of A has neglected for quite some time. If we e.g. look at the the automaker industry and agriculture; the political reign has been dominated by protectionism and neglected modernization, supported by, to mention one factor, strong lobbying from worker's unions.

If we look at the auto-industry, consider the gas-efficiency and some americans complaining about 2-3 USD / gallon gas prices. As a comparison, the after-tax-price on gasoline in Norway is about 13 NOK a liter, or 2.45 USD / liter, or about 9.26 USD / gallon. Then, if we look at the crude oil prices, which currently trades at or above 100 USD a barrel. Or, converted for american's convenience (it is not like we can expect them to do arithmetic), 100 USD per 42 gallons of crude oil; 2.38 USD / gallon for the raw material.

I expect to see even higher oil prices in USD-terms over the next couple of years, as USD depreciates against the Euro. Taking into account an EURUSD of 2 (versus today's 1.5) we have a 133 USD/bl oil price on just forex fluctuations. An oil price in the 150-200 USD range isn't something I'd be surprised to see, and that would still be relatively stable in Euro-terms.

With an upcoming presidential elections we can only hope that Americans will take a stance for a sustainable long-term economy, rather than going for the easiest quick-fix and consequently the politician promising the most. Of course, such a hope is against my better judgement, but that is after all why it is called hope.

Until then; the BRIC countries (Brazil, Russia, India and China) are what can help the global economy by supplying increased consumption. If we look at today's situation; where USA has a net negative savings rate (being indebted on average), China has a savings rate above 50%. Politicians are already trying to bring the savings rate down and support consumption rather than savings, in order to offset negative consumption growth from the US. And we are indeed seeing a slightly higher effort in savings, if only it had happened 15 years ago.

German politicians wants penal law to include violent games

Christian democrats all over the world are unreasonable, uninformed or outright crazy, but the Germans seems to top the list at the present time.

The most recent idea is to use the penal code against violent games, punishable with up till two years imprisonment, for violent behavior in online games. Now, Germany has already taken censorship of games to a new level, for instance the German version of the popular game Counter-Strike where whenever a player gets killed, it disappears in thin air instead of, as in the original version ending on the ground in a pool of blood.

The reason for the debate is the school tragedy in Nordrhein-Westfalen last month, where an 18 year old went rampaged and shot and hurt 37 people before committing suicide. The individual was later categorized as a loner, with an interest for weapons and violent games. This has led to at least two politicians in Bayern wanting to use the current paragraph 131 to also include violent games.

Personally this reminds me of Eric Arthur Blair's ( George Orwell's) book 1984, in which thought crime is punishable. This is also a phenomenon found in the movie Minority Report, starring Tom Cruise. A scary thought.

I've even checked the calendar, but it isn't the first of April as far as I can tell.

Source. Der Spiegel