All for a fairer takeover code

Effectively, CCB’s plan to take the company private failed on all three counts.

LAST week, Cycle & Carriage Bintang’s (CCB) major shareholder, Jardine Cycle & Carriage Ltd (JCCL), launched its third attempt to take the company private by extending an unconditional voluntary take-over offer to acquire the remaining shares not already owned.

To recap, in its first attempt, JCCL proposed to privatise CCB via the selective capital reduction (SCR) route at an offer price of RM2.20 per share.

First announced in November 2019, the SCR proposal was shot down by the shareholders at an EGM held in February 2020.

At that point, CCB failed to obtain the required majority in numbers and 75% in value, as those who voted for were just over 46% of the total number of voters and about 58% in total value.

Worse, slightly over 13% of the total number of voters among the disinterested shareholders voted against the SCR resolution, which is more than the less than 10% threshold that is necessary to ensure the SCR plan goes through.

Effectively, CCB’s plan to take the company private failed on all three counts.

At its first attempt, the independent adviser (IA) did advise the disinterested shareholders to vote in favour of the SCR as the offer price of RM2.20 was reasonable but not fair, as it was below the estimated realisable net asset value (RNAV) of RM3.64 per share.

Back then, the CCB board did not make any attempt to revise the SCR offer price higher despite a news report that suggested at least one large disinterested shareholder was against the proposal as the offer price was deemed to be low.

Second bite at the cherry

Having failed the first time, in March 2021, JCCL launched an unconditional voluntary takeover offer to privatise CCB at a higher price of RM2.40 per share.

As JCCL held almost 66.5% of CCB then, the offer effectively was to acquire the remaining 33.8 million shares not already owned, which would have cost JCCL some RM81.1mil.

In the circular to shareholders dated April 7, 2021, it was clearly stated under paragraph 2.1 that “The offer price was final and the offeror will not revise the offer price”.

The IA again expressed its opinion that the offer price of RM2.40 was reasonable but not fair, as it was below the estimated RNAV of RM3.71 per share.

As the offer price was slightly better than before, JCCL did receive good response to its offer but not enough to take it private, as it only obtained a total of 21.73 million shares representing a 21.57% stake, which allowed JCCL to raise its stake in CCB to 88.04%.

Since the offer expired, JCCL continued to buy shares of CCB in the open market despite issues related to the public shareholding spread, as CCB had breached the minimum requirement.

In addition, according to CCB based on filings made to Bursa Malaysia, JCCL itself did not provide any plans with regard to its intention to CCB despite CCB’s engagement with JCCL on the public spread shareholding issue.

The third strike

Having bought more shares from the open market and holding some 90.66 million shares of CCB representing 89.994% of CCB’s total shares outstanding, JCCL launched the third strike at an offer price of RM2.70 per share.

With only the remaining 10.1 million shares to be acquired under the exercise, JCCL is expected to fork out some RM27.2mil for the offer if all minority shareholders were to accept the current offer.

IA will again be sought to advise minority shareholders of the offer than is now presented, which is, by all means, higher than the previous offer by 12.5% or 30 sen per share, and 22.7% above the SCR route that JCCL had proposed in November 2019.

In all likelihood, the IA will again deem the latest offer to be reasonable but not fair, as the current net asset value of the company as at the first quarter period ended March 2022 of RM249.4mil is RM13.3mil higher than the RM236.1mil of the financial period ended Dec 31, 2020, when the last IA had assessed the takeover offer then.

This difference alone adds another 13 sen to CCB’s RNAV of RM3.71 that was derived from the IA in April 2021 circular to shareholders, assuming the property assets held by CCB are still valued based on the same valuation then and there is no reduction in the value of the properties held since then.

With just under 90% shareholding, the JCCL current offer, in all likelihood, will cross the 90% mark, which will allow the regulators to suspend the trading of CCB shares upon the expiry of five market days from the closing date of the offer.

Whether JCCL will compulsorily acquire the remaining shares not already owned will depend on the level of acceptance from this third offer, as it will only be triggered when acceptance of not less than 90% of the offer shares is received.

Fairer mechanism needed

While the third attempt to take CCB private is all above board, legal, and within the required take-over code as well as under the Capital Market Services Act, 2007, whether it is a morally right way to treat minority shareholders is another question.

The shareholders who had accepted the second offer but had missed out to make an additional 12.5% return from the offer that was made just over a year ago understood the risk involved in accepting the offer, as the offeror was determined not to revise the offer price then as clearly stated in the circular to shareholders.

Yes, it did not revise the offer price then, but it is now upping the offer price for the dissenting shareholders who will now enjoy a slightly higher price for holding on.

For the number of acceptance that JCCL received under the second offer, the company saved RM5.2mil, which would be the additional cost to JCCL if the offer price is as per the current third offer price of RM2.70 per share against the second offer of RM2.40 per share.

Should the accepting shareholders from the second offer be compensated for this shortfall?

Perhaps the regulators should make a ruling in cases like this when an offeror makes multiple attempts to take a company private but minority shareholders are shortchanged based on an earlier takeover offer price as the offeror had explicitly stated that it will not revise the offer price then.

Pankaj C Kumar is a long-time investment analyst. The views expressed here are the writer’s own.

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