Reverse takeovers heating up in red hot market

A good example is the most recent RTO proposal by S5 Holdings Inc into Ace Market-listed Ancom Logistics Bhd. The counter went ballistic after an announcement of the corporate exercise, which saw the 10-sen counter jump to an all-time high of 56 sen in just a week.

THE red hot volumes registered on the stock market almost daily has triggered a rush in interest for reverse takeovers (RTOs).

A good example is the most recent RTO proposal by S5 Holdings Inc into Ace Market-listed Ancom Logistics Bhd.

The counter went ballistic after an announcement of the corporate exercise, which saw the 10-sen counter jump to an all-time high of 56 sen in just a week.

A seasoned investment banker says there is a significant interest for RTOs because it is a “very hot market” now.

But beyond the textbook definition of the speed and lower cost to be listed on the stock exchange via RTOs, he says there is actually no flexibility or favourable terms to undertake an RTO.

“If there are no favourable terms, no easy paths, the assessment of the RTO and an initial public offering (IPO) is still the same.

“So, why do companies want to do RTOs? There’s probably one additional reason: as soon as the deal is announced, the target company shares could see a significant rise, especially in a market like this, ” he says.

Going back to the S5-Ancom Logistics deal, both parties merely announced a heads of agreement (HoA), which means there is no uncertainty that a deal will be struck.

Even so, the market reaction was a five-fold rise in the value of the target.

It should be noted that in the S5-Ancom Logistics deal, the former does not own any shares in the latter yet.

Hence the share price spike, in theory, does not benefit S5’s shareholders. In fact, it puts them in a more difficult position considering that the value of Ancom Logistics’ shares have risen a lot.

This is because S5 was going to be injected into Ancom Logistics in exchange for new shares in the latter.

However, investment bankers say that in the current vibrant market, two parties could agree to side deals considering the amount of value being created following the announcement.

Be that as it may, another dealmaker points out that there are two complications here.

One is how enforceable is that agreement going to be and secondly, disclosure rules require such arrangements to be made public in the circular to shareholders on the exercise.

The investment banker concurs that the value of listed “shell” companies has gone up in recent times, as more parties look for such assets.

This is another indication that the RTO market is heating up.

It is also interesting to note that in some instances, the new parties coming into a listed company are able to do so without triggering RTO rules.

A good example is when white knights appear to take over companies in trouble, such as those that are slapped with the Practice Note 17 (PN17) status.

Case in point, Comintel Corp Bhd found a white knight in Datuk Seri Dr S Subramaniam Pillai, who will emerge as the company’s single largest shareholder.

Comintel will be placing out 171.12 million new shares to Subramaniam, which is a 55% stake of its enlarged share capital.

Subramaniam, who is the group executive director of Dhaya Maju Infrastructure (Asia) Sdn Bhd (DMIA), will inject his railway infrastructure business into Comintel.

DMIA has granted a contract to Comintel for the provision of subcontract works in respect of the upgrading of railway infrastructure and system at Klang Valley Double Track Phase 2, with a value of not less than RM132.36mil.

Going further back into the history of RTOs, the story of how property stalwart Tan Sri Liew Kee Sin took Eco World Development Group Bhd public is a favourite.

Eco World Development Sdn Bhd and Liew’s son Tian Xiong launched a surprise takeover bid on Johor-based Focal Aims Holdings Bhd on Sept 17 in 2013 for RM230mil, giving them a 65.05% stake in the company.

The share price of Focal Aims then jumped 36.36% to 51 sen in just a day. The change of name to Eco World Development happened on Dec 23 that same year and the share price continued to soar to a high of RM4.85 in January 2014 to the point of triggering an unusual market activity (UMA) query from Bursa Malaysia.

As the market continues to sizzle, rumours will keep circulating about potential RTOs.

A recent one is that of WRP Asia Pacific Sdn Bhd, one of the largest unlisted glove manufacturers based in Sepang, which is said to have plans to reverse itself into a locally listed firm.

However, no new development of that exercise has taken place, although the rumour mill on some blogs had driven the stock price of one listed company, Acoustech Bhd, which propelled its share price from 44 sen on June 3 to 70 sen just two days later, a 59% jump. This also triggered an UMA query from Bursa.

Profit-taking ensued, which saw the counter mellowing down to 37 sen on June 15. It was 36 sen as at yesterday’s close.

And in this vibrant stock market which has seen a sudden surge in retail investors, shell companies know that they have value.

For perspective, just two months ago, there were at least five to six counters valued at only half a sen per share.

Retailers have scraped the bottom of the barrel of penny stocks to punt, pushing up the prices of these counters to at least 1.5 sen.

Shell companies know that they are now in a position to be able to squeeze more money out of those that are planning to undertake RTOs.

So has the shell price gone up?

Then again, what is the actual valuation for a shell company?

That remains a very subjective matter and it will be interesting to see RTOs or exercises akin to RTOs increasingly taking place in these times.

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