Corporate Watch
Amelia H. C. Ylagan
Quite suddenly, Sulficio Tagud, Jr. retired both from the management and the board of 2GO Group, Inc. in April, and Dennis Uy became president and chief executive officer (Rappler, 05.18.2017.). Frederic DyBuncio of SM Investments was elected ExCom chairman. Then waves of rumors and speculations of accounting overstatements of previous years’ income bore holes on the shipping company’s credibility and integrity — was it sinking? The Philippine Stock Exchange (PSE) suspended trading of 2GO shares for two days after the logistics firm submitted revised financial results for 2015, 2016 and the first quarter of 2017 (ABS-CBN News, 07.10.2017). “The Securities and Exchange Commission (SEC) is investigating the alleged discrepancy in bookkeeping of leading logistics provider 2GO Group, Inc. unearthed by the new investor group now running the company,” business news headlines flashed (Philippine Daily Inquirer-PDI, 07.10.2017).
Perhaps whispers grew bolder and embroidered upon gossip when Dennis Uy and his Udenna Corp. kept coming up in the news. In May, Uy, through his Chelsea Logistics announced that it locked in a $200-million (P10.96 billion) loan with Bank of China granted under the initial $3-billion financing package it committed during the state visit of President Duterte to China in October 2016 (Rappler, 05.18.2017). Chelsea Logistics said it plans to raise about P8 billion more via initial public offering this year. This will be the second company of the Udenna group to go public after Phoenix Petroleum Philippines, Inc.
President Rodrigo Duterte rang the bell for Phoenix Petroleum at the Philippine Stock Exchange (PSE) — the first Philippine president in recent history to attend the anniversary of the listing of a company at the PSE (Rappler, 07.11.2017). Dennis Uy donated P30 million for Duterte’s presidential campaign in 2016, according to Rappler, reportedly in appreciation of then Mayor Duterte’s saving him from a smuggling case in Davao (as revealed in an anecdote by Duterte himself at that PSE speech) (Ibid.). Duterte has appointed Uy Presidential Adviser on Sports and Uy has joined some of Duterte’s official foreign trips (Ibid.). “The Dealmaker who bet big on Duterte is building a casino-to-oil empire,” a Bloomberg news article bannered (05.26.2017).
But Dennis Uy’s reportedly unwelcome takeover of 2GO, in partnership with SM Investments makes an intriguing case study, according to one retired business management professor. The restatement of the company’s reported earnings for 2015 and 2016 is curious, according to him, because it does not immediately appear to benefit the new owners of 2GO. The recent special audit was supposed “to establish the baseline accountability of the new management.”
Interviews with insiders with knowledge of various elements of the case gave background facts and a timeline: the 2GO integrated transport solutions provider group was formerly the Aboitiz Transport Corp. (of the Superferry brand) which was part of the Aboitiz conglomerate. Aboitiz Equity Ventures sold the unit to the Negros Navigation Company, Inc. (NENACO) in 2010 for $81 million (Rappler, 04.10.2017). NENACO had two major funders/investors, the Kuwaiti KGLI-NM Holdings, Inc. (2008) and the China-ASEAN Marine B.V. (2010). By 2016, both funders were willing to sell, and the 2GO president, Sulficio Tagud, Jr. called on the company’s “right of first refusal” (per contract of sale) to buy their shares before these were offered to a third party.
Mr. Tagud signed a Term Sheet for the buy-back of the Kuwaiti shares in May 2016 and obtained approval for a loan of $120M for this purpose from Banco de Oro (BDO), NENACO’s primary banker. However, due to the conditions of the loan which NENACO could not easily comply with, the deadline for the option of first refusal came on June 29 and lapsed. Then in August 2016, Tagud was informed in a letter from Udenna that it had already acquired the Kuwaiti shares, apparently through a $120-M loan also. No, Uy did not use the $200-million loan with Bank of China (acquired after Duterte’s state visit) for the 2GO purchase, one insider opined, as he related above incidents.
Meanwhile, Tagud worked on the buy-back of the Chinese shares, acquiring approval of a $100-M loan from the Philippine National Bank (PNB) and the Standard Chartered Bank, after a P10-M deposit on the purchase. In December 2016 Undenna filed a complaint with the SEC questioning why a mandatory Tender Offer was not filed by Tagud for the purchase of the Chinese shares. The controversy coupled with the Uy purchase of the Kuwaiti shares perhaps alarmed Standard Chartered, and the closing date of Dec. 31, 2016 for the loan to Tagud was not met.
In January 2017, SM Investments bought the Chinese shares, and in March a nominee company of the SM Group, Unique Choice Global Ltd, bought out the rest of the shares of Tagud’s group.
The recent SGV audit review significantly altered bottom lines, with net income for 2015 cut by 90% to P105.13 million from the P1.08 billion previously reported; 2016 profit slashed by 74% to P344.03 million from P1.35 billion; and this year’s first quarter recording a P264.863-million net loss from a P267.562-million net income originally (www.bworldonline.com, 07.13.2017). One business professor observed that one of the oldest tricks in the new manager’s playbook is downplaying the past performance of the previous manager (by downgrading his financial results) so that current and future results turned in by the new manager will look even better to his masters.
But why would SGV, a respected audit firm, reverse its own audit findings and change accounting policies with respect to certain accounts from its own earlier audits of the same company? SGV was the auditor of the Aboitiz group even before the Aboitiz-Negros Navigation merger, and remained so until 2014, when there was disagreement with management on the treatment of some P385M deferred tax assets to be deducted from future income taxes. Tagud replaced SGV with KPMG/Manabat, also a highly respected audit firm, which audited the company from 2014-2016. KPMG followed the accounting policies that SGV had been using previously, “adhering to all standards and best practices in auditing financial statements and in view of the findings of the SGV special audit,” KPMG chairman Roberto Manabat said (The Philippine Star, 07.13.2017).
The business professor wonders if there is actually more than meets the eye in this business case. Was it a hostile takeover, a show of power of big corporations? Were there questionable professional practices, bending of rules and regulations? What is the problem, the alternative courses of action, and the recommendations, in the 2GO business case study?
Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.
ahcylagan@yahoo.com
