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Saturday, October 1, 2011

Questions aplenty over PNB’s bid to control SP Setia

Niche development: The Setia Eco Park with its amazing landscaping and strong development concept in Shah Alam is the flagship development of the company. Liew’s prowess in building an oustanding franchise has made SP Setia synonymous with him.

Tan Sri Liew Kee Sin, the chief architect of one of Malaysia's largest listed developer SP Setia Bhd, is faced with his biggest test - possibly ever. A highly volatile environment, a global economic slowdown cranking up the pressure on property prices as well as demand and thinning margins, all of which have led to property counters suffering a beating on the local bourse.

And this - some of his peers in the property sector appear to be exiting their long-held and hard-fought investments. Even so, they pale by comparison to what could possibly be a Catch 22 situation which Liew found himself in over the week.

That circumstance was triggered by Permodalan Nasional Bhd (PNB), SP Setia's largest shareholder which surprised everyone (including Liew apparently) with a conditional general offer aimed at raising its stake to over 50% to cement control in the blue-chip developer after it triggered the takeover threshold of 33%.

The offer, announced on Wednesday, was tagged at RM3.90 per share and 91 sen per warrant. Interestingly, SP Setia board, in the name of meeting its fiduciary duties, shot out a note to Bursa Malaysia that the deal fundamentally undervalued the company and that it was seeking competitive bids from other interested parties while urging PNB to revise its offer price upwards.

A day later, as the market was abuzz with PNB's ostensibly “hostile” offer, its president and chief executive officer Tan Sri Hamad Kama Piah Che Othman set out to explain the biggest question in everyone's mind - that it is the wish of the country's largest fund manager to continue to work with the current management of SP Setia (led by Liew) to deliver value to shareholders. Describing the offer price as fair and reasonable, PNB also says it intends to retain the developer's listed status.

Blue chip developer

No one can deny that Liew, who currently owns just over 11% in SP Setia, has long been instrumental in the company's growth story not only in Malaysia but also in the region since he engineered a reverse takeover of SP Setia, then a construction firm, in 1996 and became the company's executive director and subsequently group managing director.

Prior to that, Liew had worked in the banking sector for five years but it was in property development which he eventually embarked on where he found his true passion.

In the mid 80s to 90s, he had cut his teeth in the property sector with large projects such as Bukit Indah Ampang and Pusat Bandar Puchong.

Owing to Liew's prowess in having built an oustanding franchise, SP Setia has become somewhat synonymous with him. So, it came across as somewhat intriguing when PNB revealed its plan to raise its stake in the company it has invested in since 2000 and emerged as a 30% shareholder in 2008, more so because the move was construed not to have the “blessing” of the current management. This is however hard to believe considering the pivotal role played by Liew and his team in the group.

“SP Setia, without Tan Sri Liew and the management team, will not be worth RM3.90. Should Liew decide to take up the offer and cash-out, we believe a good number of his management will follow suit, and SP Setia could lose its ability to execute projects well,” said Credit Suisse in a research note.

Therein may rest the rationale behind the offer price which most analysts predict may not be compelling for Liew, the company's key driver for 15 years, to accept. “The plan by PNB seems to be aimed at keeping Liew exactly where he is while gaining control of the company,” says an observer.

Even so, a source says the takeover bid is highly unnerving for the staff of SP Setia who are “fiercely loyal to Liew.” Soon after the takeover notice was served on Wednesday morning, Liew called for a meeting with his faithful employees to reassure them that their jobs were safe.

Hamad says the offer is in line with the fund's long-term strategy of enhancing property investments and beefing up its portfolio. But many are still wondering if there's more than meets the eye. One thing is clear - it should suit PNB's interest to retain the current management of SP Setia.

That's a fact the country's largest fund manager openly admits to: “PNB believes that the entrepreneurial spirit of SP Setia's management team will continue to create value for its shareholders over the long term...this partnership will bring about the desired results which will benefit all stakeholders.”

Still the question remains only half answered - why did PNB, which owns 33% in SP Setia together with parties acting in concert, launch the offer? Was there a rift? Were they split on a certain plan?

The possible trigger(s)

Sources close to the company say SP Setia's senior management has a strong working relationship with PNB as well as the other major shareholders namely the Employees Provident Fund (EPF), which has a 13.43% stake and Kumpulan Wang Persaraan, 5%. Foreign investors hold a 21% interest in SP Setia.

EPF's decision on PNB's offer will be interesting to watch. PNB has two nominee directors on the board - Tan Sri Dr Wan Mohd Zahid Mohd Noordin and Datuk Noor Farida Mohd Ariffin. Sources close to the company say there was no indication from these directors, on behalf of the shareholder, at any time that there was any unhappiness or dissatisfaction about the company's business direction or how it was being managed.

One speculation is that PNB is concerned that given the depressed market sentiments and the undervalued stock, another party could emerge as a major shareholder in SP Setia. (SP Setia shares fell to the year's low at RM3.06 on Sept 22).

That may not be too far off the mark. It is believed that SP Setia and Sime Darby Bhd (a company in which PNB, Skim Amanah Saham Bumiputera and Pengurusan Pelaburan ASN Bhd have a combine 48.35% stake) are in talks for a plan to swap Sime's landbank for shares in SP Setia as part of a joint venture deal. If the deal had panned out, Sime Darby would have emerged as a major shareholder with 20% in SP Setia.

In turn, SP Setia would have acquired RM2bil worth of Sime Darby's strategic landbank along the Guthrie Corridor Expressway and in Labu, Negri Sembilan. As this would have involved issuance of new SP Setia shares, PNB's stake in the developer would have been diluted.

According to observers, the top management of Sime Darby and PNB do not always see eye to eye, which if correct, could explain PNB's move to wrest control of the property stalwart.

There's also another speculation. An observer says Liew could have been toying with the idea to exit his long-built investment in SP Setia. However sources close to him vehemently deny this. “He is definitely not behaving as a man who is looking to sell out. If anything, he seems just as committed to grow the company, not least because there's a lot left to do and there's much potential growth to be tapped further,” says an observer.

But could Liew, understandably so, be holding out for a higher price? This notion was partly sparked by the board's move to invite competing takeover bids and call to PNB to revise its offer upwards.

“The concern now is that if too many shareholders decide to take up the offer, PNB and the PACs may end up having more than they set out to get and would have to pare down their stakes to maintain the 25% public shareholding spread,” the source says.

Indeed, the notice of takeover offer issued by Maybank Investment Bank Bhd does state that should the level of acceptances received by the offeror result in the public shareholding spread of the company being less than 25%, then the offeror will explore various options or proposals to rectify the public shareholding spread.

The GLC agenda

Detractors of PNB's plan describe it as part of a bigger government-linked company (GLC) agenda gobbling up private businesses, not unlike UEM Land Bhd-Sunrise Bhd and Sime Darby Bhd-Eastern & Oriental Bhd deals and by doing so, “crowding out” the entrepreneur-driven private sector. (UEM Land Holdings Bhd's RM1.39bil acquisition of Sunrise Bhd was completed earlier in the year and Sime Darby recently acquired a 30% stake in E&O for RM766mil).

“This may not send the right message across. Entrepreneurs will think twice about their role in this country if they build a good company and create value only to see it being swallowed up by government agencies flexing their muscles,” says an observer, adding that this was counter to the Government's calls over the past two years for the private sector to lead in the economic transformation agenda.

However, E&O managing director Datuk Terry Tham (he sold 12.2% of a 17.3% stake) and Sunrise executive chairman Datuk Tong Kooi Ong (sold his 24.6% interest in Sunrise) exited at a good price which meant these deals were largely market-driven.

Furthermore, in the case of E&O, the company needed capital to develop its flagship project Seri Tanjung Pinang in Penang while in the case of Sunrise, notable for its focus on Mont'Kiara in Kuala Lumpur, the lack of landbank was a prime reason for the company to seek a merger to grow.

In addition, the waning landbank faced by these developers and the need to plough in more investments to acquire and develop land are compelling factors for self-made entrepreneurs who feel they have already served time growing their investments and this may be a good time to exit. The ability to secure a “decent” offer price for their shares of course is one major factor.

Truth is, as far as shareholding is concerned, SP Setia is infact a GLC; government-linked funds PNB, EPF and KWAP collectively own 52% in the company. This has its obvious benefits. SP Setia has won a number of bids to develop strategic parcels of land particularly in and around the central Klang Valley.

Is the price right?

The market's reaction to PNB's takeover offer for SP Setia's shares have been guarded as many do not discount a higher offer price from the offeror or from another party.

While the offer price for the shares represent an 11.4% premium and the offer price to the warrant represent a 97.8% premium to Tuesday's closing prices, a number of analysts point out that the offer price for the shares is lower than the revised net asset value (RNAV) of the company of between RM4.50 and RM5.

A number of analysts view the offer as positive in the short-term but wonder about the longer-term. CIMB Investment Bank Bhd research head Terence Wong says in a report that the conditional offer is positive for SP Setia's share price in the short-term as it is 11% above the last traded price and should provide a floor price during this period of global stockmarket turbulence.

“But the longer-term implications of the offer could be more complicated. SP Setia is awaiting details from PNB on the level of control that PNB may want to exert after increasing its stake,” he says.

Due to SP Setia's board seeking alternative bids and a higher price from PNB, Wong posits two scenarios, one of which sees Liew and his management team continuing to run the company with the asset manager going into joint ventures or injecting landbank into SP Setia at arm's length prices.

He says in this scenario, as a PNB subsidiary, the company will have access to vast landbank across the country as well as a better chance at securing land privatisation projects such as the Rubber Research Institute land.

Wong says due to enhanced prospects, the company's share price may scale new highs when markets rebound and the properties regain favour.

However, the worst-case scenario sees Liew accepting the offer (presumably higher than what's currently on the table) by PNB or another party, thereby depriving the asset manager and the company of one of the most dynamic and aggressive CEOs in not just the property industry but in the country.

“As SP Setia's employees are loyal to him, it is conceivable that many will want to join him in his next endeavour. In such a scenario, the price may turn out to be very high for PNB as it will end up with a company with a lot of landbank but without the senior management necessary to execute those projects,” Wong says.

In this scenario, he says the premium valuations (financial year ending Dec 31 of 26 times based on RM3.90) that the company commands as the bellwether and best-managed property company in Malaysia may start to disappear.

RHB Research Institute Sdn Bhd analyst Loong Kok Wen recommends shareholders to accept the offer. Her rationale is that with a downturn in the property industry, the “offer gives another opportunity to shareholders who wish to exit in the midst of short-term cyclical downturn”.

She says in the longer-term, when the stock market and property industry turned positive, there may be a possibility that PNB will inject I&P Group Sdn Bhd (its property arm that is a merger of three companies - Island & Peninsular, Petaling Garden Bhd and Pelangi Bhd) into SP Setia.

“The offer price also suggests a 13% premium to our estimated RNAV (which has been reduced recently with our sector downgrade) and FY11 price/earnings of 20.7 times,” Loong says. She adds that the price is 16% off the 52-week high of RM4.62 and only 3 sen to 4 sen above the recent placement price of RM3.86 (adjusted for bonus issue).

In short, views among the analyst fraternity appear largely mixed on whether or not shareholders should accept PNB's offer. This of course fits in perfectly with PNB's agenda - to become a formidable shareholder while keeping the company listed. But for shareholders looking for a handsome exit plan, it's a reason for resentment.

By The Star