Short Position - Strange partners

gloves rubber

Old glove names are coming out of the woodwork for a possible listing through reverse takeovers.

However, the possibility of its happening seems remote based on the choice of companies that is being touted as the reverse takeover target.

A few weeks ago Acoustech Bhd, a company that is in the business of manufacturing multimedia speakers systems, speaker units and specialised chemical paints, was speculated to be the backdoor vehicle of unlisted glove manufacturer WRP Asia Sdn Bhd.

The shares of Acoustech, that was trading at about 40 sen late last month shot up to more than 75 sen within a week. It was at the height of the glove frenzy that took Bursa Malaysia by storm for the whole month of May and early June.

The sharp rise in Acoustech, which is also into property development, caught the attention of Bursa Malaysia. Following a query, the company replied that there was nothing out of the ordinary happening, which warranted the sharp rise in the share price.

Yesterday, MQ Technology Bhd, a company that manufacturers various mechanical parts such as coils, precision plates, jigs and fixtures clarified to a news report that it was keen on negotiating with the shareholders of Latexx Partners.

Latexx Partners is a major glove manufacturer that was privatised in May 2013 at a cost of RM580mil by Semperit Group.

MQ Tech, which has a market capitalisation of only RM35mil and has been making losses in the last few years.

The company stated that it intends to acquire the glove company and would be in negotiations with the Semperit Group on the proposed acquisition.

MQ Tech also stated that the terms of acquisition have yet to be finalised.

With glove manufacturers having a heyday during this Covid 19 pandemic, Latexx Partner’s valuations would certainly be much higher now.

Which brings to question as to how would MQ Tech afford the purchase? Even if the deal is to be financed by issuance of new shares, Semperit would probably be left holding almost the entire company.

Secondly, it is not clear if Semperit is keen to do a deal with MQ Tech.

Obviously, the euphoria surrounding glove stocks have reduced as MQ Tech shares hardly moved following the report.

Tech M&As, but who benefits

Recently, two listed tech firms announced their own acquisition plans. However there were significant differences in those deals that have raised questions on who benefits in such deals and whether governance issues are at stake.

Last Wednesday, MyEG Services Bhd announced plans to fork out RM90mil for a mere 10% stake in a little known company called S5 Systems Sdn Bhd. MyEG claimed that S5, which is involved in immigration security and control systems, will help MyEG’s offerings to capture deals in the immigration space. It is also believed that S5 will partner MyEG to bid for the RM1.5bil National Integrated Immigration System (IIS) project.

But opaqueness surrounds the deal. MyEG is buying the stake from a British Virgin Island registered entity called Merrington Assets Ltd (MAL), whose ultimate shareholders are unclear. MyEG is paying the bulk of the RM90mil in cash - so basically, an unknown entity is walking away with RM75mil in cash from a listed company, plus not to mention new MyEG stock worth the balance RM15mil.

There is also little clarity on how S5 has managed to win so many government immigration deals in the past. S5 reported a strong net profit of some RM63mil for FY2019. That said, CGS-CIMB Research said the acquisition will strengthen MyEG’s position in the e-government services sector. The stock brokerage added that MyEG stands to benefit from the potential listing of S5, which could materialise within the next two years.

In comparison, this week Green Packet Bhd said it is buying 100% of a tech startup called Xendity, which was founded by Malaysian fintech entrepreneur Sia Hui Yong.

Xendity is being valued at US$10mil, but the bulk of that amount is being paid for in new Green Packet stock. And just under half of the total payment is being tied to performance targets spread out over the next two years. Xendity has the green light of Bank Negara Malaysia to roll out its eKYC products in the local market, and is deemed a bolt on investment for Green Packet.

The two deals by these tech firms are for different rationale and for different stages of growth of the acquirer companies. It is left to be seen which of these acquirers will benefit from these acquisitions that come at a time when corporate activity seems to have come to a standstill.

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Glove , M&As , Acuostech , MQ Technology , MyEG Services , SS Systems ,


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