By Khairie Hisyam
A recent takeover offer for MWE Holdings was aborted when its directors asked for another month to ponder the offer on top of the original nine days. But what was the harm in allowing more time and what lessons can we learn from this episode?
Surin Upatkoon, the largest shareholder of conglomerate MWE Holdings Berhad, wanted to take the company private and offered what seemed to be a generous amount to do so. But the offer may not be as generous as it could – and arguably should – have been.
And strangely, Surin seems to have wanted shareholders to accept the offer very quickly or not at all. This begs some questions as shareholders effectively only had nine days to mull over his offer, hardly sufficient for the average investor to make a fully informed decision.
His offer, extended on Nov 30, 2015 by Surin’s vehicle Pinjaya Sdn Bhd, proposed to pay RM391.4 million for MWE Holdings’ business concerns, which translates to RM1.70 per share or a 7% premium to the closing price of RM1.59 per share on Nov 30. (The offer is a 22% premium to the closing price of RM1.39 per share on the previous trading day’s close, Nov 27.)
The way the proposed takeover works is that Pinjaya will pay roughly 68% of the total amount, or RM267.5 million, in cash. As for the remaining RM123.9 million, this amount will be set-off against what Pinjaya and persons acting in concert would have received from the distribution of the RM391.4 million – which control 32.9%. Surin’s party would be entitled to RM128.7 million or so from the total payment.
MWE Holdings will then go private following the distribution of RM1.70 per share to all other shareholders.
However, this proposed deal was aborted when the non-interested directors requested on Dec 9 for an additional month to decide on the offer and Surin refused on Dec 10, letting his offer lapse.
The refusal is strange. If the deal is a win-win for both Surin’s party and the rest of MWE Holdings’ shareholders, surely allowing an additional month would not be a problem. Shareholders would be further convinced that the offer is good if an independent valuation point towards a good deal, which is hardly possible to undertake in just over a week.
Would there have been a spanner thrown into the deal should shareholders be allowed an extra month to consider the merits and potential downsides of the offer?
It is difficult to say, but a closer look at the company in respect of the aborted offer raises some points to ponder.
Generous offer?
On the surface, the RM1.70 per share seems generous compared to MWE Holdings’ share price performance. The counter had been lacklustre this year, mostly keeping below RM1.40 per share.
And the offer sparked interest with a 14% surge by the closing bell on Nov 30. At the closing bell of Dec 10, the counter was at RM1.55 per share, giving up the gains as a result of the takeover offer.
However generosity is, as always, relative. While it seems that Surin and company are forking out RM267.5 million in cash for the deal, it bears mentioning that as at Sept 30, 2015, MWE Holdings is sitting on some RM113.6 million in cash and bank balances – monies that would come under their control if the deal goes through.
MWE Holdings itself seems to be okay as a business. As at the second quarter ended Sept 30, 2015 (2Q16), its gearing ratio is at 36%.
It booked a pre-tax loss of RM56.6 million in 2Q16 but that is due to an impairment of RM58.1 million for its investment in Kumpulan Europlus Berhad as part of its mark-to-market approach. In terms of gross profit, MWE Holdings booked RM20.1 million that quarter.
All things considered, it may seem a fair deal. But there may be a deeper layer of purpose to the proposed privatisation, which in turn raises some important questions for shareholders to ask before the aborted deal could have taken place.
How much are MWE assets really worth?
A quick glance at MWE Holdings’ latest annual report yields a top 10 list of its properties, some of which were acquired as far back as 1990. These properties are recorded at net book value in the annual report.
A simple KINIBIZ check against comparable transacted prices recorded by the Ministry of Finance in nearby areas indicate that these five alone may be undervalued by at least RM368.62 million.
The potential undervaluation amount of these five assets alone more than offset the RM267.5 million in cash that Surin’s party is laying out for this proposed privatisation, especially considering the company itself is sitting on RM113.6 million in cash and bank balances.
In terms of per share value, RM368.62 million works out to RM1.60 per share – even if we put, say, a 25% discount on this amount, that is still an extra RM1.20 per share that shareholders may be losing out on if they accept the current RM1.70 per share offer.
While a scenario where Surin and company takes over MWE Holdings only to strip it down and sell everything may be too much a stretch for the imagination, this is balanced by the consideration that MWE Holdings may have further undervalued assets not listed in its annual report.
Of course, the takeover offer remains reasonable if shareholders are willing to exit at that price and let go of the potential further gains from unlocking the value of the company’s assets.
However, the primary concern here is whether shareholders are aware of this crucial point in the entire exercise.
Already the short notice given for the offer – the offer was extended on Nov 30 with the deadline just over a week after – raises concerns on whether shareholders are being given enough time to come to an informed decision.
That a request for just one more month to think things through was rejected does not cast a favourable light on the original offer. In this respect perhaps the shareholders rightly deserve more than one more month to ensure they have all available information that is relevant to proper decision-making.
Further, a potential game-changing consideration here is the announcement this month that construction works for Penang Light Rail Transit (LRT) project will commence in 2018, as part of the state’s larger Penang Transport Master Plan (PTMP) undertaking.
With this in mind, it is worth asking whether any of MWE Holdings’ assets are ripe for acquisition for the purposes of PTMP or, alternatively, well-positioned to gain from potential appreciation by virtue of proximity to major infrastructure developments from the plan.
Writ large here is whether the company should perhaps call for an immediate revaluation of its entire assets, and possibly how these may be affected by major infrastructure developments near their locations, in preparation for future takeover offers.
By extension worth considering is whether such immediate revaluation exercises upon takeover offers being extended should be made compulsory for all listed companies. A strong case in favour would be the seemingly generous privatisation offer in the case of Delloyd Ventures last year.
In that particular instance, shareholders were offered RM4.80 per share, seemingly generous with a premium of more than 20%. A KINIBIZ analysis found that the company’s assets indicate the shares are at least worth RM20 apiece, meaning shareholders would have lost out in a lot of potential gain by accepting a much lower offer.
The market can only win if the average investor is provided an informed – and as current as possible at all times – perspective through which he or she participates in the market.
GRRRRR!!!
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