Private matters


  • Business
  • Saturday, 15 Mar 2003

BY DARSHINI M. NATHAN

Boustead Holdings Bhd has joined the growing list of parent corporations eager to convert their listed subsidiaries into wholly-owned entities.  

From the onset, it may seem like a loss to have quality listed companies wrested away from the exchange, particularly when the pickings at the local bourse do not seem rich.  

But not quite: “When you think about it, it's no big loss to the investing public as they never really had much chance to get hold of those shares,” says an observer.  

The truth is most of the shares in these companies are closely held and as such deemed illiquid.  

In the case of MMC Engineering Group Bhd 74.99 per cent of it is held directly or indirectly by MMC Corp Bhd (MMC).  

Similarly, with Powertek Bhd, parent Tanjong plc settled the issue of not meeting the Kuala Lumpur Stock Exchange's minimum 25 per cent free float requirement by making a voluntary general offer last July for the remaining 17.3 per cent stake it did not already own in Powertek. 

The financial logic behind the move is quite obvious.  

Parent companies need spend a lot less to mop up the remaining public shareholdings of their listed subsidiaries rather than having to issue more shares to meet the free float requirements.  

But if anything at all, it is hoped that the public shareholders will earn a premium for ceding complete control of the company's management to the parent. In some cases, this has taken place.  

More recently, shares of Kuala Sidim hit a two-year high on Tuesday following news that Boustead was willing to pay RM6 per share to de-list the plantation company. 

 

How it all started 

 

The trend began when the government via its investment arm Khazanah Nasional Bhd took United Engineers (M) Bhd private as part of its efforts to restructure the latter.  

This was followed up with announcements of the Rashid Hussain group privatising RHB Sakura Merchant Bankers Bhd, Sime Darby Bhd de-listing DMIB Bhd and Tanjong plc buying up the whole of Powertek Bhd. 

When MMC made its announcement to take MMC Engineering private, the market was already braced with the question “Who next?”  

Ang Kok Heng, senior general manager of TA Asset Management Sdn Bhd, attributes the trend to the current bearish market conditions, which have led to many stocks with beaten down valuations. 

“Not surprisingly, many parent companies now find that they would be better off buying up the remaining shares they do not already own in those subsidiaries and have them contribute fully to group earnings.  

He says: “The move certainly enhances the value of the acquiring company by increasing its NTA (net tangible assets) and bringing down its PE (price earnings).”  

 

More to the move  

 

Kuala Sidim has failed to meet the KLSE's shareholding spread requirement. The proposed voluntary offer is meant to resolve the free float issue while seemingly providing shareholders with an opportunity to exit at a premium to the market price prior to the offer. 

But there is more to be read into the move. For starters, Boustead's move to privatise the subsidiary may be partly motivated by its need to tap the cash-generating Kuala Sidim, which is a pure plantation play.  

According to Mayban Securities, Kuala Sidim reported improved results for the financial year ended Dec 31, 2002, thanks to higher crude palm oil prices, which pushed revenue up by 55 per cent from financial year 2001.  

As a result, Kuala Sidim emerged the main earnings driver for the Boustead group, contributing nearly 50 per cent to the latter's pre-tax profit for the financial year ended Dec 31, 2002, the research house says. 

Ultimately, Boustead will also benefit from the efficient deployment of its group assets and capital base even as it successfully reduces the administrative costs associated with maintaining an illiquid listed subsidiary. 

Although the conventional wisdom of taking an undervalued subsidiary is easy to grasp, a research head says the exercise may be subject to elements of abuse at times. 

He says: “There have been instances of parent companies privatising a subsidiary at the expense of their own minority shareholders by offering to undertake a general offer at a hefty premium to the subsidiary's market pricing in order to bail out another party”. 

Using Boustead-Kuala Sidim case simply as an example, the research head says the two have a common substantial shareholder – Lembaga Tabung Angkatan Tentera (LTAT).  

He say: “Assuming that LTAT needs the money, it could have approached Boustead's board of directors to take over Kuala Sidim so that it would have the opportunity to cash out of the plantation company”. 

 

Other compelling reasons 

 

One observer points out that in most of the cases, the subsidiaries tend to be in a better financial position and exhibit better growth prospects when compared with the parent companies intending to make the takeovers.  

A prime example is Hume Industries (M) Bhd's takeover of Hume Cemboard Bhd that, financially, has long been a star performer within the Hume group of companies.  

According to an analyst, Hume Cemboard has posted a compounded annual growth rate of more than 25 per cent over the past five years while its return on equity over the same period stood at about 14 per cent. 

Going forward, the acquisition of Hume Cemboard will serve to enhance Hume Industries' earnings, while altering investors' perception of the latter as that of a mere holding company.  

With Hume Industries emerging as a pure building materials play, industry analysts say the company is ripe for a re-rating.  

Another case worth noting is the de-listing of MMC Engineering by parent MMC.  

Earlier this year, MMC had proposed to take the 75 per cent-owned subsidiary private in an effort to consolidate the group's cash-generating sources and add value at group level. 

It is widely known that MMC needs something to tide it over until its jewel in the crown – Port of Tanjong Pelepas – is able to contribute to group earnings by financial year 2004.  

Thus by privatising MMC Engineering, MMC, in the interim, will benefit from the full earnings of the former which currently contributes less than 10 per cent to its pre-tax profits.  

Currently, it is also dependent on dividend income from its investments in Malakoff Bhd, Gas Malaysia Bhd and Sime Darby. 

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