With a 45% shareholding in poultry player Lay Hong, the founding Yap family is firmly entrenched in the company and clearly doesn’t think that the RM3.50 per share offer price by QL is valuing the company sufficiently.
Their spurning of QL’s offer also isn’t a surprise, considering that the Yaps, together with other shareholders, had booted out the sole QL representative on Lay Hong’s board in September.
Recall that it was only two days after that incident that QL launched the general offer for Lay Hong’s shares, indicating the hostile nature of that bid.
But will QL raise their offer price and thus entice the Yaps into selling?
The answer is in the negative. “We have no plans to offer a higher price,” says Chia Mak Hooi, the QL executive director who was the one removed from the Lay Hong board.
In his email reply to StarBizWeek, Mak Hooi says it is too early to talk about QL opting to sell out from Lay Hong (considering that its buyout offer may not be successful). But he adds: “We are optimistic of this exercise. However, should our takeover not be successful, we will evaluate our position and determine the next course of action.”
Another possible development is for some sort of agreement to be reached between the parties. Lay Hong’s head honcho, Yap Hoong Chai and QL founder Chia Song Kun were once friends and school mates and even had a small business venture together.
Says QL’s Mak Hooi, “We do not rule out any possibilities and we are always open to amicable solutions. Our interest is to ensure that our shareholders’ investment and interest in Lay Hong are protected.”
Insiders speculate that QL, which made a general offer for Lay Hong shares not owned by it on Sept 24, may only want to raise its shareholding in the latter to more than 50% and thereby wrestle control of it.
QL, who has been substantial shareholders of Lay Hong since 2010, has also been mopping up shares from the market since making its offer, raising its stake in Lay Hong to 35% from 23.29%.
QL emerged as a major shareholder in Lay Hong back in 2010 after buying a 23.29% stake from London Biscuits Bhd at RM1.05 a share for a total of RM11.55mil.
Their 35% stake in Lay Hong is now worth RM61mil.
Offer conditional on 50% acceptances
The question now is whether QL will reach the 50% threshold?
There are many reasons why this is significant. Firstly, it will enable QL to gain control of Lay Hong and its board. At present, despite having a 35% stake in Lay Hong, QL doesn’t have any representation on the board of Lay Hong.
Secondly, QL will be able to consolidate the earnings of Lay Hong although that would only have a small impact on QL’s current earnings.
For financial year ended March 31, 2014 (FY14), QL reported a net profit of RM159.93mil while Lay Hong’s net profit was a mere RM7.16mil.
Thirdly, the 50% threshold is significant because QL’s general offer for Lay Hong shares is conditional upon QL achieving at least a 50% shareholding in the latter. This means that the offer will fail if it doesn’t meet that level and minority shareholders will not be able to sell their shares to QL.
A recent report by JF Apex Securities says that QL’s management is unsure if its offer for Lay Hong will succeed.
Minority shareholders, however, have the option of selling their shares in the market today, as Lay Hong’s share price of RM3.46 is about the same level as the buyout price.
Indications are that QL will not receive acceptances sufficient to give it that 50% shareholding in Lay Hong.
When QL’s Mak Hooi was voted out of Lay Hong’s board, that motion was supported by 63% of votes, indicating that the Yap family has other supporters in the company, aside from its 45% block.
But why is QL after Lay Hong?
QL has been eyeing potential acquisitions and an integrated poultry company like Lay Hong would be a good “bolt on” investment, considering that QL is an agri-food giant.
QL produces 3.2 million eggs per day, making it the largest egg producer, while Lay Hong produces 1.8 million eggs daily.
“If the takeover is successful, we are confident of achieving synergies and efficiency improvements arising from better cost management and economies of scale.
“The addition of Lay Hong to QL’s portfolio can contribute to QL’s growth and further cement our position as the leading poultry company in Malaysia,” QL’s Chia says.
At the RM3.50 price tag, QL is valuing Lay Hong at a toppish price earnings (PE) multiple of 25 times earnings, and analysts have described the offer price as an “expensive” one.
Independent advisor, Mercury Securities Sdn Bhd, points out that the offer price is higher than the PE multiples of 10.2 times to 20.3 times earnings range for comparable companies.
QL in tough spot
Clearly, selling out of the business doesn’t seem to be a priority for the Yap family, considering that the family has run it for over four decades and two generations.
By spurning this offer, the Yaps are throwing away the opportunity to cash in a whopping RM78.75mil from QL.
The Yap family has also been working to revive the company and helped it move from a loss of net loss of RM17.79mil in FY13 to a net profit of RM7.16mil in FY14.
In the second quarter ended Sept 30, Lay Hong recorded close to a seven-fold rise in net profit to RM6.3mil from RM909,000 a year earlier, which came about from operational improvements plus a drop in the prices of chicken feed.
According to the independent advice circular by Mercury Securities, the reasons for the Yap family’s decision to reject the offer by QL is that it wants to continue to share the future growth of Lay Hong.
The circular pointed out that five out of seven directors intend to reject QL’s offer. These five include four members of the Yap family.
With these hurdles in place, one wonders what QL’s next step would be.
The end of this saga will depend on whether QL is able to secure 50% stake in Lay Hong. If it does, it would be able to wrestle control over Lay Hong although it is likely that the Yaps would not go down without a fight.
On the other hand, if QL doesn’t hit the 50% threshold, and its buyout offer fails, QL would be in a tough spot as it would most likely be kept out of the management of Lay Hong, let alone pursue any synergies between the two companies.
QL may then consider the option of hiving off its entire block of shares in Lay Hong. But who would be willing to pay that price for it?
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