Complications in Public Bank’s corporate exercise

MUCH has been said in the media about Public Bank Bhd’s (PBB) rare corporate exercise involving the proposed acquisition of 175.9 million shares in LPI Capital Bhd at an offer price of RM9.80 per share from the estate of the late Tan Sri Dr Teh Hong Piow and Consolidated Teh Holdings Sdn Bhd (Estate), announced last month.

The acquisition of a 44.15% interest in LPI also triggered a mandatory general offer (MGO) to acquire all the remaining shares not already owned by PBB at the same cash offer price, RM9.80 per share, subject to adjustments, if any.

While most of the reports are positive on the deal (of course, why not?), the market’s surprising response is rather telling as PBB’s share price, even up to the time of writing, is lower than the pre-suspension price, although LPI’s share price has since recovered.

There must be a reason why investors are concerned about the deal and the impact on PBB in the years to come.

Let’s analyse the reasons behind these concerns.Is RM9.80 a fair price for LPI?

According to the announcement made by PBB, LPI shares are being acquired at a price-to-book (P/B) measurement of 1.7 times, a price-earnings ratio (PER) of 12.4 times, and an enterprise value over earnings before interest, depreciation and amortisation (EV/Ebitda) of 8.9 times.

Compared with regional benchmarks and transactions, the acquisition of LPI at 1.7 times P/B is the highest ratio within the region.

The PER of 12.4 times is marginally higher than the simple average of 12.1 times, while the EV/Ebitda of 8.9 times is below the simple average of 9.6 times.

When compared with local transactions, which are predominantly done based on the P/B method, the acquisition of LPI at 1.7 times is marginally above the simple average of 1.64 times.

While it is fair to compare the acquisition price with past transactions, the offeror could have done a better job justifying the RM9.80 share price, given that it was at a 24.6% discount to the last traded price of RM13 per LPI share.

In addition, as LPI pays dividends of approximately 60 sen to 70 sen per share every year, it is fair to assume that the company enjoys one of the highest returns on equity in the market, which stood at 13.7% last year.

It has a dividend payout ratio of more than 80% every year and provides investors with a high dividend yield of more than 4.5% a year.

Historically, LPI has always traded at more than two times P/B and this has even gone up to more than three times in past years.

Price-wise, the last time LPI traded at the price PBB is offering was just after Covid in March 2020, and before that, sometime in February 2017.

Surely, the offer price is not fair to minority shareholders, who are considering the MGO route to exit.

Of course, these shareholders have the direct benefit of a higher market price, allowing them to easily sell their LPI shares should they wish to exit.

Typically, an MGO is set at an attractive price for minority shareholders to exit, irrespective of the offeror’s intentions regarding listing status.

The proposed transaction between the Estate and PBB is not at a fair market price, although the latter’s non-interested directors opined it was justified on a willing-buyer, willing-seller basis.Share overhang?

With the acquisition of LPI, the Estate that owns the PBB shares has also announced plans to pare down its total effective stake in the second-largest listed company on Bursa Malaysia to 10%, as permitted by Bank Negara.

This share disposal will be done over a period of five years through a restricted offer for sale (ROFS).

In essence, this involves the sale of approximately 2.6 billion PBB shares worth some RM11.5bil, as the Estate presently owns about 4.55 billion shares, or 23.41%.

The ROFS involves the sale of approximately 520.7mil shares a year worth some RM2.3bil.

Should these shares be offered to shareholders instead, the remaining shareholders, other than PBB shares held by the Estate, would be allocated at approximately 1,000 existing PBB shares for every 5,700 PBB shares they hold.

This translates to approximately RM0.78 per PBB share held by existing shareholders, other than the Estate.

LPI must dispose of PBB shares first

The deal to acquire LPI by PBB comes with a twist as the former itself holds some 220.3mil shares in the latter, valued at almost RM973.7mil.

Hence, not only do we have the Estate looking to pare down 2.6 billion shares, but we also have LPI that would need to deal with its holding of PPB shares.

Although not explicitly mentioned in the announcement made by PBB to Bursa Malaysia, it is believed that LPI will sell or distribute these PBB shares before finalising the acquisition from the Estate.

This is to avoid cross-holdings as PBB cannot and should not be holding shares in LPI, which in turn is also a shareholder of PBB.

MGO price may be adjusted down

There are two options available to LPI as to how it wishes to deal with its 220.3 million PBB shares.

It can either sell the shares in the open market or via direct business transactions at a discount to the current market price.

A 5% discount to the market price will see LPI realising some RM925mil in gross proceeds.

This can then be distributed back to all its shareholders in the form of special dividends, which translates to approximately RM2.32 per LPI share.

The MGO price would then likely be reduced by a similar quantum to RM7.48 per share.

However, should LPI distribute this block of shares to its shareholders, including the Estate, each shareholder would receive a windfall of approximately 550 PBB shares for every 1,000 LPI shares held.

Assuming this is done at RM4.42 per PBB share, this would also mean the MGO price will be revised down by RM2.44 per share (220.3 million PBB shares at RM4.42 each divided by LPI’s share base of 398.4 million shares) to RM7.36 per share.

In this scenario, the Estate would receive some 96.7 million additional PBB shares, increasing its stake in the banking group to 23.9%.

The Estate would then be required to sell this additional block over the next five years, worth some RM427.6mil based on the current share price of RM4.42.

A third, though less likely, scenario is for LPI to distribute the PBB shares to all its shareholders, excluding the Estate.

In this scenario, LPI shareholders are in for a bigger windfall of approximately 990 PBB shares worth some RM4,376 for every 1,000 LPI shares held.

This distribution could adjust LPI’s share price to RM9.12 per share.

This raises the question of whether the MGO price to acquire PBB from the Estate would remain at RM9.80 per share, which is higher than the theoretical ex-price of LPI shares post-distribution, or be adjusted to RM5.42 per share, as the majority of shareholders, other than the Estate, will receive the distribution.

In conclusion, while the deal to acquire LPI shares from the Estate is welcome, the acquisition price is not seen as fair or reasonable.

There are also complications to the deal and the final adjusted MGO price due to the PBB shares held by LPI.

It is also essential for the authorities to ensure that the cross-holdings are dealt with before the deal is completed.