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Wednesday June 23, 2010

Khazanah's partial offer for Parkway is a masterstroke

AN interesting feature in the much-publicised tussle for control over Singapore-listed Parkway Healthcare Ltd is Khazanah Nasional Bhd’s masterstroke of launching a partial offer to gain control of the former.

Khazanah’s partial offer put it in an advantageous position, whereby it only needs to fork out about a third of what it have to pay had it made a full general offer.

The partial offer is aimed at raising Khazanah’s stake in Parkway to 51% from its current 23.8% and ensuring that the Singapore healthcare company does not fall into the control of new shareholder, Indian-based Fortis Healthcare Ltd.

If Fortis wants to counter bid Khazanah’s partial offer, it would need to launch a full general offer. Singapore takeover laws that allow for partial offers, forbids those who have bought shares in the last six months from making a partial offer. Another huge advantage for those entitled to make partial offers is that in the event a bidding war ensues, the offeror is allowed to raise its offer price but only make partial offers in all its bids.

Considering how useful the option of partial offers are, the question is, can buyers of listed companies in Malaysia do this?

Apparently, the option does exist. Sources close to the workings of the Securities Commission say that the regulator will allow partial offers on a case-by-case basis.

The last time a partial offer was undertaken was in June 2001, when Telenor Asia made a voluntary partial takeover offer for DiGi shares at RM6.60 per share to enable the Norwegian telco giant to increase its stake to 61% from 32.9% it then held.

Telenor could not increase its stake beyond 60% as that was the foreign shareholding limit on Malaysian telecommunications operators. Hence, it was a no brainer that Telenor was allowed by the SC to do such a voluntary offer.

Moreover, as partial offers mean that existing shareholders will only be allowed to sell a portion of shares into the general offer, those who kept the shares they did not sell must have been thankful for that option. Telenor had built DiGi into a much better company than it was at that point in time, and this had reflected in the multiple times its share price appreciated over time.

Indeed, that is the key to knowing whether a party can make a partial offer for shares in a company. If the offeror is say, a strategic party with knowledge and a plan of how it wants to create value or turn around the operations of the target company, then the regulator will be inclined to allow that party to make a partial offer. What the regulator does not want to see happen is the buyer making a partial offer to gain control of a company, to the detriment of minority shareholders.

To be sure, there is quite a bit of subjectivity involved here. For example, how to stop a savvy party, in the guise of being a private equity fund, to say that it is seeking to control 51% of a target company in the name of turning around that operations but whose real intention may be otherwise. Shouldn’t the minority shareholders be given a chance to fully exit that company if they don’t believe the buyer’s story?

To solve that problem, the track record of the buyer needs to be established before the regulator approves the deal. Furthermore, the details of the turnaround plan will be carefully studied and so too will the people behind the bid. The good news is that more clarity on partial offers should come about in the revision of the Malaysian Code on Takeovers and Mergers, which is work in progress.

Deputy news editor Risen Jayaseelan reckons that partial offers pave the way for more value-creating M&A possiblities, if regulated well.

Related Stories:
Fortis said to be in no hurry to decide on Khazanah’s Parkway offer
RiskMetrics recommends Khazanah bid for Parkway
Offer circular for Parkway out this week
Takeover battle for Parkway pits two different cultures
India’s Fortis hires banks as Parkway battle heats up
Source: Khazanah prefers to invest in hospitals, not pharmaceuticals
Khazanah makes formal offer for Parkway
Khazanah wants to enhance presence in healthcare industry
Fortis poised for counter bid for Parkway

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