This article first appeared in The Edge Malaysia Weekly on November 28, 2022 - December 4, 2022

WILL things go back to normal at wafer manufacturer SilTerra Malaysia Sdn Bhd after the arbitration between its shareholders — Dagang NeXchange Bhd (DNex), which has 60% equity interest, and Beijing Integrated Circuit Advanced Manufacturing and High-End Equipment Equity Investment Fund Center (Limited Partnership), better known as CGP, which has a 40% shareholding — is concluded?

While all parties involved — DNeX, CGP and even the Ministry of International Trade and Industry (Miti) — did not reply to questions from The Edge, owing to the ongoing dispute and ensuing arbitration, those familiar with the workings at SilTerra say the relationship between the two parties is currently cordial and not strained. But it is hard to say how long things will remain amicable, according to a source familiar with the issue.

“For now, things are professional, cordial at the board level. After all, there is a company [SilTerra] to run … but the arbitration may take about six months, and things could get acrimonious in between,” the source says.

An analysts’ briefing by DNeX last Friday failed to shed any light on what might happen at SilTerra.

To recap, the crux of the issue is that one of the conditions for DNeX’s acquisition of SilTerra was that the wafer foundry has to be 55%-owned by a Malaysian entity or its manufacturing licence would be revoked.

DNeX and CGP had in July last year acquired SilTerra from Khazanah Nasional Bhd for RM273 million cash with an undertaking for a capital injection of RM200 million by way of subscribing for new ordinary shares in SilTerra.

DNeX’s 60% portion of the RM273 million, at about RM163.8 million, was funded via a private placement, internally generated funds and borrowings.

When the acquisition was undertaken, one of the funding options discussed was for DNeX Semiconductor Sdn Bhd, the wholly-owned unit of DNeX that holds the 60% in SilTerra, to issue RM100 million worth of Irredeemable Convertible Preference Shares (ICPS), which would be subscribed by Mimastronics Technologies Co Ltd (MIMAS), CGP’s unit that holds the remaining 40% in SilTerra.

This RM100 million in ICPS came about because DNeX would need to cough up RM120 million as 60% of the RM200 million capital injection.

If MIMAS were to subscribe for the RM100 million in preference shares, it would have a 33.33% stake in DNeX Semiconductor, which would reduce DNeX’s stake in SilTerra to below 55% and thus result in the possible revocation of SilTerra’s manufacturing licence.

Thus DNeX scrapped the ICPS plan in entirety, after Miti had reiterated the need for the 55% shareholding in a letter at end-February this year.

CGP is looking, however, at enforcing the issuance of ICPS by DNeX Semiconductor. It is unclear whether CGP has found a way around this regulation requiring 55% Malaysian control.

According to DNeX’s announcements to Bursa Malaysia, MIMAS is purported to have stamped the ICPS subscription agreement using scanned copies of the agreements that DNeX signed, which is, it seems, against the understanding of the two parties that only wet ink copies (that is, signed copies) would be stamped.

So, while DNeX may say the ICPS subscription is no longer on the table, as no shareholder approval from DNeX was obtained, CGP is likely to claim otherwise.

If the parties remain at loggerheads post-arbitration, it is likely that either one of the two will sell out. If Miti’s ruling of a 55% shareholding is to be adhered to, there could be a scenario of CGP selling out, with DNeX having the first right of refusal.

This is conjecture, though.

In any case, Taiwanese wafer giant Hon Hai Precision Industry Co Ltd, popularly known as Foxconn and a 3.8% shareholder in DNeX, could take up CGP’s stake in SilTerra if the need arises.

Last Friday, DNeX released the financial results for its first financial quarter ended September 2022. The company chalked up net profits of RM41.72 million from RM419.58 million in revenue. For the corresponding period a year ago, DNeX raked in RM293.56 million in net profits from RM270.87 million in revenue.

In explaining the results, DNeX says there was a one-off negative goodwill of RM264.51million in 1QFY2022 arising from the purchase of SilTerra, and the improved results in the quarter just ended were “mainly contributed from the technology segment”, or SilTerra.

Under DNeX, SilTerra seems to be faring well.

A check on the Companies Commission of Malaysia website shows that for the financial year ended December 2020 (before DNeX and CGP took over), SilTerra suffered an after-tax loss of RM51.65 million from RM556.39 million in revenue. The wafer manufacturer saw four consecutive years of losses; as at end-2020, it had negative reserves of RM1.81 billion, total assets of RM478.09 million and total liabilities of RM1.1 billion.

Meanwhile, DNeX had cash and cash equivalents of RM786.2 million as at end-September this year; on the other side of the balance sheet, it had long-term debt commitments of RM244.22 million and current liabilities pegged at RM78.42 million.

There are two opposing views on the feud. One says that, without CGP, SilTerra may not be as valuable. In contrast, others whom The Edge spoke to say that, with Foxconn in its corner, DNeX can do without CGP.

It remains to be seen how this chess game will pan out.

DNeX’s share price has taken a beating, falling 27% since mid-November to last Friday’s close of 57 sen, giving it a market capitalisation of RM1.78 billion.

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