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Thursday, December 9, 2010

Property merger mania and what’s in it for minoriy shareholders

An aerial view of Sunway City Ipoh

AGAINST the backdrop of still-distressed economic conditions in the Euro zone, Chinese inflationary worries and perhaps most disconcertingly, the war games in the Korean Peninsula, major shareholders, corporates and bankers are realising that the window for deal-making could be fast closing.

Also perhaps these deals are via the asset-liability route and requires currently only 50% approval compared to other routes which requires at least 75% approval from disinterested shareholders and thus want to take the opportunity now to do these deals without needing to entice a larger portion of minorities and with a price that may need to be good enough for the deal to go through.

These recent spates of deal making, however, need not necessarily be a bad thing if two key questions are answered: firstly, whether minorities are getting a fair and reasonable offer for their shares, and secondly, whether they have the option to ride on the upside of the merged entity's, if any.

First, the UEM Land-Sunrise merger. UEM Land has offered Sunrise shareholders RM2.80 for their shares in an all-stock deal, and has rejected calls to raise its RM1.4bil offer even though Sunrise shares have risen beyond the offer price.

Being an all share deal the minorities can ride on the upside nevertheless, if any.

The market price of Sunrise has risen above the offer price and minorities have the option to sell into the market.

As it stands, three of Sunrise's major shareholders, namely Datuk Tong Kooi Ong, Datuk Allan Lim and Tan Sri Tan Chee Sing, with a combined 40.34% stake have agreed to the offer.

However, UEM Land still needs another 9.7% for the deal to happen. This was where minorities, who had reason to push for a better price, may do so, or reject the deal.

As for the RM7bil merger plan between MRCB and IJM Land, the Employees Provident Fund, being a major owner in both entities looks like the kingmaker in this instance.

As master developer of the Rubber Research Institute's 3,300-acre parcel of land (next to Kota Damansara, Selangor), the EPF quite simply needs the expertise to make this new township a success, in line with the aims envisaged under the country's Economic Transformation Programme.

The property sector is key to Malaysia's growth, and the EPF needs developers that can build townships as well as commercial projects, in a broad plan that will benefit EPF members.

The proposed merger would be implemented through a scheme of arrangement under Section 176 of the Act, and while both companies have yet to come up with a definitive agreement, it has been stated that a new company would be formed, in which both IJM Land and MRCB would exchange shares, or a combination of shares and cash.

Shares in IJM Land and MRCB would be exchanged based on RM3.65 per share for IJM Land and RM2.30 per share for MRCB.

The offers represent a 19% premium and 7% premium respectively to IJM Land's and MRCB's last traded share price prior to suspension.

Pending further details, there appears to be a premium to the last traded prices, but the upside to this offer is the exposure to the potential of the 3,300 acre development, an area three times the size of Petaling Jaya.

Minority shareholders of both companies might take heart, since it seems illogical that the EPF would want to exit what was essentially a deal of their orchestration. The deal pricing, at 2.5 times price-to-book for IJM land and 2.6 times for MRCB, also appear fair.

Minorities might also want to see how IJM Corp, who as 60% owners of IJM Land, reacts to this deal. IJM Land, after all, did suffer from liquidity issues pre-merger plan, and such a deal would almost certainly boost liquidity.

A definitive agreement between MRCB and IJM Land was expected to be sealed by Dec 14 this year.

And lastly, the plan by Tan Sri Jeffrey Cheah to combine Sunway Holdings and Sunway City in a RM4.5bil deal.

Tan Sri's intention appears two-fold: firstly to create a bigger entity to win larger jobs, and secondly, to safeguard against hostile or unwanted takeovers.

A new company would be formed, where Sunway City would be valued at RM5.10 a share, or a fairly high PE of 12.4 times 2011 earnings, itself at the higher end of the company's 0.5-12.5 times historical PE ratio band.

Sunway Holdings, whose shares are valued at RM2.60 a share under Tan Sri's offer, translates into a PE of 10 times 2011 earnings, and 1.7 times price-to-book value.

Most significantly, Sunway's new company was said to be valued at 12.6 times 2011 PER, which was a significant discount to the other property developers such as SP Setia's 22.8 times, UEM Land-Sunrise's or IJM Land-MRCB's which was above 30 times.

It is easy to see the respective intentions behind all three deals to create bigger companies to give capacity and capability as well as attracting more investors with the bigger size.

A bigger footprint also puts the merged companies under the radar of foreign institutional funds, which was good for capital markets. It was also an argument that applies to a merged Sunway property-construction company.

But deal making and the travails of the global economy aside, the concept of Quid Pro Quo should operate: make it win-win for all parties involved, otherwise expect time to be wasted before the deal can be concluded.

In any case the primary and initial concern should be to obtain the unequivocal buy-in of the minority shareholders?

Beyond question, property companies with significant land banks, financial strength and development expertise would be crucial in succeeding in the future, especially since there are broad expectations for the property sector to stabilise and morph into a medium-housing play in the medium- to long-term, minus the hefty margins of today.

It's just that in the process of getting there, everyone should benefit.

And minority shareholders, who many of them took the earliest leap of faith with the companies involved, should be the ones that need to be given consideration in terms of fair price, first and foremost.

Rita Benoy Bushon is chief executive officer of the Minority Shareholder Watchdog Group

By The Star (by Rita Benoy Bushon)

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