IT’S not often that we get a David vs Goliath battle in corporate Malaysia and, more interestingly, when the two companies are friendly parties.
But this is precisely the crux of the matter in the unexpected corporate manoeuvring between QL Resources Bhd – a RM4.3bil-market capitalised giant – and its takeover of Lay Hong Bhd, a company with a modest market capitalisation of RM175.6mil.
Spicing up the takeover is the fact that the founders of both companies are friends who go back a long way. The developments since the bid was made seem to indicate that it was hostile, a rarity in the local corporate scene unlike developed markets where large corporations are never in total control of any one party and where unsolicited hostile bids are the norm.
“When QL’s nominee did not get re-elected to Lay Hong’s board, being its second-largest shareholder, it was the first sign that all is not well,” quips one industry observer.
QL has a 26.81% stake in Lay Hong, with the controlling shareholders and founders, the Yap family, holding a 44.17% interest. QL’s stated rationale for launching the takeover bid is that it was done to safeguard its investment in Lay Hong, but industry insiders say there’s more to the story. The fight has the makings of a corporate tussle that could hog the limelight in the weeks to come.
The general offer price by QL of RM3.50 a share may not be the end of the matter either, considering that Lay Hong’s shares had risen past that price this week. So, could there be a higher buyout price either by QL or the Yap family?
At RM3.50, analysts reckon that the stock is already overpriced. “Based on peer comparison, the offer is expensive. The valuation of 24 times historical earnings represents a 60% premium over its peer average of 15 times,” notes Alliance Research in a report.
To QL, Lay Hong is a nice piece to have as part of its growth story. QL is a market leader in the poultry business with a local production rate of 3.2 million eggs per day. In the marine processing segment, it is the largest producer of surimi in Asia, and via a 40.7% stake in Boilermech Holdings Bhd, has a presence in palm oil activities.
QL was founded by 64-year-old Chia Song Kun, a mathematician-turned-entrepreneur who is instrumental in growing QL from a traditional small-scale business nearly 30 years ago selling seashells to feed mills to the multi-billion-ringgit-cap stock it is today with a presence in China, Vietnam and Indonesia. Its earnings growth has made the stock a darling of investors.
The Chia family, via CBG Holdings Bhd, meanwhile, controls 42.7% of QL.
But the company has also reached a stage where growth has hit a plateau. Of the 11 research firms polled by Bloomberg on QL, six have a “hold” or “neutral” call on the stock, signalling that the market is possibly waiting for a re-rating catalyst.
This is why QL is said to be keen on increasing its interest in Lay Hong, say industry sources. With Lay Hong in the equation producing 1.8 million eggs per day, this will further entrench QL’s pole position. Lay Hong also has a strong branding amongst poultry players with its NutriPlus range of products.
Analysts say that QL could also benefit from synergies from new businesses in liquid eggs, processed chicken products and supermarket retail that Lay Hong has a presence in. Lay Hong operates a supermarket chain with 16 outlets in Sabah.
To buy up the remaining 73.2% shareholding in Lay Hong that it does not own, QL will have to fork out a total of RM128.2mil. In poultry parlance, this is chicken feed for QL, given its strong cash position of over RM200mil as of June 30.
However, sources say that the Yap family of Lay Hong is unwilling to give QL more shares in the company, which could pose a threat to its control.
This is believed to be the cause of the friction between the two parties that has been quietly brewing in the last couple of months. According to CIMB Research in a report, it “understands that both companies have failed to collaborate strategically, while QL has little access to Lay Hong’s financials”.
In early March, QL started mopping up shares of Lay Hong from the open market to raise its stake to the current 26.81% from 23.29% previously - a defensive strategy on its part.
QL had bought the 23.29% stake in 2010 from London Biscuits Bhd at RM1.05 a share for a total of RM11.55mil.
In an interview with StarBizWeek in early July, Lay Hong’s managing director Yap Hoong Chai revealed that his peer at QL, Song Kun, had approached him before to buy more of Lay Hong’s shares. Hoong Chai’s father had started Lay Hong in the 1960s.
Ironically, in that interview, Hoong Chai had brushed off speculation relating to a takeover or merger with QL, and had half in jest said, “It would have to be an offer that we can’t refuse.” He, however, had declined to say what a good offer meant. On QL’s interest to raise its stake in the stock, Hoong Chai had said that it was “because he (Song Kun) could see potential in Lay Hong”.
During the interview, Hoong Chai had described Song Kun as a good corporate player. “It appears that he has a golden touch, any share he touches has the potential to go up,” Hoong Chai had told StarBizWeek.
The 63-year-old Hoong Chai had said he was happy to have QL as a major shareholder of the company. “I am proud of him (Song Kun). QL has grown so big,” he had said.
Hoong Chai and Song Kun, hailing from Klang, were schoolmates. Hoong Chai revealed that in the early years, both of them had operated their businesses side-by-side. The two friends had also gone into a joint venture to set up a layer farm business - the industry jargon for the rearing of chickens to produce eggs - in Sabah, but due to a conflict of interest, had decided to split up.
Whither QL’s pecking order?
The speed in which QL launched the takeover of Lay Hong in just two days after its board representative, Chia Mak Hooi, had failed to get re-elected as a director of Lay Hong must be a record of sorts. Mak Hooi who is also an executive director of QL, was the sole QL representative in Lay Hong. This was the only resolution that was not passed at Lay Hong’s recent annual general meeting (AGM) on Monday.
Without a representative in Lay Hong, QL would no longer be able to influence the corporate direction of the former.
This was the last straw that broke the camel’s back for QL. Song Kun was said to be very unhappy over this decision, which QL insiders claim “it did not see coming”.
QL declined to comment when contacted.
Meanwhile, Yap Chor How, Lay Hong’s marketing director and son of Hoong Chai, when contacted, says: “The offer came as a surprise to us. There is a lot to consider at this juncture, we are still looking at it…it will take some time for us to process the matter.
“There has been some misunderstanding between us and QL... conflict of interest issues because QL has its own vision and we (Lay Hong) have our own plans,” he tells StarBizWeek. He says Lay Hong would be calling a press conference next week to clear the air.
QL’s takeover offer is expected to meet with resistance from the Yap family.
“The Yaps have held control of Lay Hong for over four decades. In the last three years, management has put in place plans to revive the company. Surely, they would not want to relinquish control, being close to reaping the rewards,” says one industry source.
The Yap family seems to have supporters too. Recall that 63% of shareholders had voted against the resolution to re-elect Mak Hooi at the AGM. These are likely parties friendly to the controlling shareholders.
If the Yap family’s stake is discounted, then the maximum QL can receive is only 56% of the total shares of Lay Hong.
The takeover of Lay Hong at RM3.50 a share is conditional upon QL receiving acceptances of more than 50% of the voting shares in the former. QL intends to privatise the company.
According to CIMB Research, to secure a seat on Lay Hong’s board, QL needs to gain at least 23% acceptance.
Lay Hong’s share price has rallied by 30% since the launch of the offer on Wednesday, which may render the current offer, while at a premium, unattractive to minorities.
With these hurdles, one wonders what QL’s endgame is. Will it dispose its entire investment in Lay Hong if it finds itself on the losing end?
Similarly, back in 2010, plantation giant Sime Darby Bhd had sold its entire 22% stake in Palmco Holdings Bhd after it had failed in a tussle for control of the company against IOI Corp Bhd. Sime Daby had made a gain from that disposal. Based on yesterday’s closing price of RM3.51, QL is already sitting on a tidy gain from the initial investment of RM1.05 per share four years ago.
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