By Xavier Kong
On the surface, it may very well seem that Johor Corp, Kulim (Malaysia) Bhd’s largest shareholder, is losing out on a proposed RM2.2 billion privatisation deal. However, a closer look reveals a little more about the deal.
There are times when Tiger is surprised by the news, and Tiger does not mean in a bad way. There are times when the bit of news really is rather positive, and Tiger wishes that there were more of those. The most recent one for this Tiger would be the news that Johor Corp has made a privatisation offer for Kulim (Malaysia) Bhd.
At first, this seemed like a questionable proposition to this Tiger. Johor Corp is the largest shareholder in Kulim, with a 61.8% stake. So why are they willing to pay RM4.10 per share for every share that they do not own in Kulim?
That represents a premium of 24%, considering that, at the time of the offer, Kulim’s shares were being traded at RM3.30 per share, with the total consideration being offered a pretty cool RM2.22 billion.
Sounds fishy, does it not?
Of course, this also sounds like a random deal that Tiger plucked off Bursa Malaysia. But Tiger would like to point out that, while it seems counter-intuitive for Johor Corp to be making such an offer for the shares in Kulim they do not own, this deal actually represents a win-win scenario for both Johor Corp and the minority shareholder.
The win for the minority shareholder, which includes the Employees Provident Fund (EPF) as well as Retirement Fund Inc (KWAP), is fairly obvious, due to the premium that is attached to the shares they are holding. The gain per share of 80 sen becomes quite a tidy sum, considering the smallest lot of shares is 100. Even assuming the shareholder only holds that one lot of 100 shares, that’s still RM80 that is being pocketed should the sale go on.
Now, taking that quantum, and raising it to the scale of, say, EPF, who owns a 4.82% stake, or 58.8 million shares, would give the fund another RM47 million to work around with.
But what does Johor Corp gain from all this, considering Kulim had sold their 49% stake in New Britain Palm Oil Ltd, their primary source of revenue, for RM2.8 billion last February? This would leave Johor Corp in control of a company that only holds on to its own palm oil plantations, which by themselves are smaller than what other local players are mustering (according to Johor Corp), as well as a 50.8% stake in shipping company EA Technique (M) Bhd.
Yet another reason Johor Corp is urging minority shareholders to accept the offer is that Kulim is thinking of looking into oil exploration which, given the current volatility in oil prices, would mean a longer turnaround time should Kulim head out on that particular venture.
However, here is where Tiger had a closer look, and took a running leap down this particular rabbit hole.
A quick check of Kulim’s balance sheet revealed that the company has a pretty solid balance sheet, with a war chest of RM1.74 billion in terms of cash and cash equivalents as of the end of Kulim’s second quarter of their 2015 financial year. Of course, this money remains untouchable, except through insanely high dividends, to all shareholders, as long as Kulim remained a public-listed company.
Here is where the win for Johor Corp comes in. Should the deal be accepted, with Kulim privatised, Johor Corp would then be able to access the sum, considering they would be the ones holding the reins at that point. This would definitely help to offset the RM2.22 billion that they are paying for the remainder 38.2% in Kulim shares.
But even that valuation is a winning deal for Johor Corp. Looking through the balance sheet also revealed that, as of Kulim’s second quarter of 2015 (2Q15), the company has a nett asset per share value of RM3.74. Taking the offer price of RM4.10 per share, this places the offer’s price-to-book value at 1.1 times, which is actually fairly decent for Johor Corp, as well as Kulim’s minority shareholders.
Beyond that, Johor Corp also gets control of Kulim’s competencies, such as the land and property from Kulim’s plantations and property investment segments, as well as the stake in shipping company EA Technique. Heck, Kulim even has a cattle farm!
Considering that, after taking into account how the consideration is offset by the funds Johor Corp will gain control over, the effective payment from Johor Corp is about RM480 million, Tiger would say that this is a win for Johor Corp.
As it now stands, this becomes a win-win proposition and, unless minority shareholders continue holding onto Kulim’s shares in faith of the company’s future potential, the deal should turn out favourably for both Johor Corp and the minority shareholders.
This has turned out to be a pleasant change for this Tiger. Now, if only something similar happens with 1MDB…
GRRRRR!!!
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