The internationalisation strategies of local companies

Financial Article 419 by Edward Rizzo - Jan 28, 2016

A number of local institutional as well as retail investors claim that due to the limited growth opportunities in Malta, they prefer having a larger proportion of their investment portfolios exposed to foreign companies which are listed on the more liquid overseas stock exchanges than to Maltese listed securities.

Indeed, few of these investors probably realise that a number of companies listed on the Malta Stock Exchange have little exposure to Malta and their respective operations are mainly carried out in international markets.

The announcement on 8 October by Medserv plc that it entered into a conditional share purchase agreement for the acquisition of three companies in the Middle East for a total of USD46 million is the latest example of the internationalisation strategy of a publicly traded Maltese company.

Medserv has just concluded the dual funding programme to carry out this acquisition which is effectively doubling the size of the company in its current format. Medserv is not new to operating outside Malta. Although throughout its 43-year history it always had a logistical base in Malta (mainly to assist international oil companies and their subcontractors for work offshore Libya), Medserv had also set up shop in Misurata, Libya some years ago and more recently it opened a similar facility in Cyprus after being awarded a lucrative contract by ENI.

The upcoming acquisition of METS in the Middle East will enable Medserv to make substantial progress in its long-term plan of increasing its geographic presence, strengthen its portfolio of services and expand its customer base with additional international oil and gas companies and subcontractors. Apart from Malta, Cyprus and now also the Middle East, Medserv is currently also tendering for work in Egypt, Portugal and as far as Trinidad & Tobago. As such, this seems to be just the start of a more rapid international expansion from its original Malta base.

 

“The companies … which have their equity listed and traded on the MSE and are operating and expanding internationally are more prone to being taken over either by competitors in their field or other institutional investors.”


 

Although Medserv seem to be making quick progress in this respect, probably the company which is mainly regarded as the pioneer in adopting a successful internationalisation strategy is International Hotel Investments plc, the subsidiary of the Corinthia Group. Most local investors by now are surely well versed with the humble origins of Corinthia and its success in expanding also as a private company in foreign jurisdictions in the 1990’s. The setting up of IHI and the listing of the company’s shares on the MSE in 2000 was intended to pursue this expansion strategy in a more structured manner including the addition of important international shareholders. Although last year IHI conducted a significant acquisition in Malta which contributed to it now becoming more dependent on hotel and property development locally, the bulk of its sizable asset base is still international with its portfolio of owned-hotels and other real estate in London, Lisbon, Budapest, St. Petersburg, Prague and Libya. Moreover, following last year’s acquisition of Island Hotels Group, IHI is also exposed to the Spanish market with the Costa Coffee franchise in the South of Spain, Balearic & Canary Islands. The ambitions of IHI and its hotel management arm CHI are to continue seeking further international expansion and Chairman Alfred Pisani has been speaking about various other international projects in the pipeline.

Another company that at first was given little importance by local investors but has grown exponentially over the past five years winning some significant international contracts is RS2 Software plc. This IT company had initially set up in Malta over 25 years ago to service its only Maltese customer. From its development facilities in Malta, it then expanded internationally across a variety of markets. The more notable developments came in recent years when Barclays Bank first entered into a licence agreement for GBP8.5 million to utilise RS2’s card management software and quickly followed this by an acquisition of an equity stake of 18.25%. Another larger contract by a global processing company amounting to EUR16.5 million was awarded to RS2 in 2014 and the ten-fold increase in the value of the company over the past 5 years makes this the best performing equity, by far, on the MSE. Although RS2 can be regarded as a Maltese company and is still listed on the MSE, it should surely be regarded as an international company given its shareholder structure, its client base and its target of continuing to expand internationally especially in Asia and the US.

Other companies that are very much dependent on their overseas operations include 6pm Holdings plc which was always very much focused on the UK market and in fact its reporting currency is GBP. In more recent years, while remaining very much focused on  work from the NHS in the UK, the company also set its sights on expanding in other regions, namely in Macedonia and Ireland. Grand Harbour Marina plc, which would not normally be placed within the same league as the above companies, also expanded internationally. Their acquisition of a 45% stake in a Turkish marina some years ago also makes this company dependent on international markets given the important shareholding in the Turkish marina.

While many of the companies mentioned above have achieved a significant degree of success in international expansion and these all have further very ambitious goals in new markets, we have also had some very sour experiences from companies that have suffered significantly as a result of ill-timed investments and unfortunate circumstances.

Two that immediately come to mind are Middlesea Insurance plc and the failure of Progress Assicurazioni SpA as well as the difficulties faced by GO plc in the Greek market.

The significant losses faced by Middlesea Insurance plc (now Mapfre Middlesea plc) from the bankruptcy of its sizeable operation in Italy is not easily forgotten as it wiped out a large amount of reserves and a rights issue was needed to shore up the company’s finances.

Likewise, the write-off of the Greek investment in the financial statements of GO plc was also a sour experience for the company’s numerous shareholders and the market at large. However, while Forthnet is still operational and some value could eventually be recovered if it is taken oven by some international suitors that have an expressed an interest in the company, GO plc rightly did not lose its appetite for international expansion. In fact, only last week, GO confirmed that it exercised its option of increasing its stake in the Cypriot telecoms company Cablenet from an initial 25% to 51%. Since Cablenet is a private telecoms company and we never had access to its financial statements, GO’s executives always claimed that the Cypriot company was profitable and growing at double-digit figures. In an interview with GO’s CEO last May, Yiannos Michaelides had claimed that eventually the size of this company can also surpass that of the GO Group. In a statement to the press last week following the acquisition of the additional stake in Cablenet, GO’s Chairman Deepak Padmanabhan again confirmed that Cablenet is performing strongly, and delivering “steady, double-digit growth in both revenue and EBITDA over recent years”. The Chairman also stated that Cablenet offers significant potential for GO. This is a very interesting development for shareholders especially in view of the current situation whereby GO’s Board is seeking potential investors for the Group following the decision by the majority shareholder to dispose of its investment.

Another Malta listed company that transacted its business mainly internationally is FIMBank plc. The initial years of its international expansion were very successful and led to the sale of its stake in GTF in India for a very sizeable profit. However, in more recent years, their subsequent venture in India and also in Russia led to significant losses for shareholders. Hopefully, a new consolidation strategy including the downsizing of some of its international operations will now start bearing some positive results as indicated by the Directors of FIMBank last November when announcing that the third quarter of their 2015 financial year was a profitable one.

In addition to the above companies which all have their equity listed on the MSE, there are some that only have their bonds listed and are also very much involved across international markets. In this category, Mariner Finance plc, Premier Capital plc, PTL Holdings plc and Hili Properties plc feature among the subsidiary and associate companies of the Corinthia Group. Incidentally, three of these companies (Premier Capital plc, PTL Holdings plc and Hili Properties plc) are all ultimately owned by Hili Ventures Ltd. Premier Capital plc this week also made an important announcement informing the investing public that it had made a USD65 million acquisition of the development licensee of the 66 McDonald’s restaurants in Romania.

The companies mentioned above which have their equity listed and traded on the MSE and are operating and expanding internationally are more prone to being taken over either by competitors in their field or other institutional investors. Local investors experienced this recently with Crimsonwing plc. It would be surprising if some of these companies do not feature on the radar screens of possible buyers as takeover targets given their recent successes and ambitious strategies of entering new markets.

In view of their respective international growth strategies, these local companies need to depart from customary practice and disclose more information to the investing community including the publication of financial forecasts and projections of their key financial figures and performance indicators. The disclosure of such information may also further encourage both local and foreign retail and institutional investors to gain a small exposure to these companies as part of their overall investment portfolios.

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