There was a recent corporate exercise that was announced 2 days ago (30/7/15) by KAF-SEAGROATT & CAMPBELL BERHAD (KAFSC). The deal gives a yield that is slightly below FD rate and ranges between 3.45% to 3.85%, but within a tenure of 2 to 3 months, assuming no delays.
(Click here to see the announcement)
I thought the deal was pretty good! But I was surprise that that the market was willing to give such a high yield for what I thought was an almost certain corporate exercise. This is almost akin to somebody throwing free money on the streets and no one is picking them up because it is too little! Did the market just mispriced this free money opportunity?
Background
1. The purchaser, KAFIB has entered into a Share Sale Agreement (SSA) to buy 76.74% KAFSC shares from the following parties whom I will call “Vendors” hereon, at RM 2.70 each.
– AKKA SB
– AKKA Holdings SB
– Datuk Khatijah BT Ahmad
– Thariq Usman B Ahmad
2. Proposed Mandatory General Offer (MGO) to all minorities at RM 2.70 a share
This is NOT a privatisation. I know it looks like 1 and acts like 1, but going by the wordings, it is not. This is just an offer to the minorities that if they want to sell at RM 2.70 to KAFIB, KAFIB is required to buy it, and KAFIB cannot say no. A few things however needs to be done for this to happen.
The deal sounds very similar to this, doesn’t it? Lol…
1. Approval from Vendor, KAFIB and KAF Securities SB (the holding company of KAFIB) shareholders and directors
Comment: KAFIB Directors have already entered into a SSA with the Vendors on 30th July 2015. I think a gentleman’s agreement must have at least been done by both KAFIB and KAF Securities SB shareholders with the Directors and shareholders of both AKKA Holdings SB and AKKA SB or why else sign the SSA in the first place?
2. Bank Negara (BNM) and Securities Commission’s (SC) approval
Comment: This is a related party transaction so this may be the biggest hurdle. Nevertheless, if the price is fair, both institutions should not block the deal as it is a (relatively) free market anyways. No one can stop the Vendor from selling their company ownership to a willing Purchaser (unless they are from a Communist country =3).
Is RM 2.70 a share fair? From the way I see it, the company should be worth more than RM 2.70 as it has ALOT OF LAND, and ALOT OF IT has not been revalued since 2005! Under normal circumstances, I think minorities would have rejected the deal as RM 2.70 is unfair and unreasonable.
From the latest Walt Disney movie, Inside Out. Anyone watched it yet?
HOWEVER!
The SSA is an almost sure-go and there is nothing the minorities can do to stop it as it is a private transaction between the Vendors and Purchasers. Moreover, the share sale will lead to less than 25% market liquidity of KAFSC, the minimum liquidity required by SC or the listed company will risk being delisted.
So rather than holding unlisted shares, I think the next rational choice a smart investor would do is buy at RM 2.61 and sell it to KAFIB at RM 2.70 (that is why it is called MGO). It is unfortunate but there is nothing the minorities can do if BNM and SC approves of the deal.
BUT!
But can this be so simple? I mean… there must be a reason why nobody is closing the gap to RM 2.70 right? Am I missing something? I hope I am right about this, but I really am not sure. Anyone out there willing to share with me their 2 cents?
Clement Ting 