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Thursday, November 29, 2007

Analysts positive on E&O, E&O Prop merger

KUALA LUMPUR: Analysts have responded positively to Eastern & Oriental Bhd’s proposed merger with its 63% owned subsidiary E&O Property Development Bhd, believing such an exercise to be of strategic sense and expecting it to be a success based on the E&O brand and the group’s track record.

Following the announcement on Tuesday, E&O Property’s share price rose 11 sen to close at RM2.56, with 1.39 million shares done, while E&O’s share price rose one sen to close at RM2.41, with 372,900 shares done. E&O Property and E&O were traded at their intra-day high of RM2.70 and RM2.45, respectively.

Kenanga Research said some advantages of the consolidation included the streamlining of operations and E&O group would have a higher earnings capacity leading to greater market influence under one listed company and in turn significantly expedite the group’s expansion locally and overseas, especially in the climate of the property market boom in Southeast Asia.

“Given both E&O Property’s and E&O’s track records, we believe that these benefits provide a robust base for sustainable value creation which will see fruition in the long term. Based on the E&O brand and the group’s track record, we are confident that the merger will prove to be a success,” it said.

On the flip side, it said there would be uncertainties in the near term relating to the companies’ share price, the foregone flexibility to raise equity funding from the market at E&O Property level and the loss of a pure property investment alternative.

Credit Suisse said the E&O group would be able to consolidate its financial operational expertise and resources to take advantage of growth opportunities and the consolidation was also expected to reduce conflict of interest and related party transactions between the two companies.

“We believe that the cash option is not attractive as the offer of RM2.50 per share is only at a 2% premium to the share price. Nevertheless, the cash option provides downside protection.

“We would advise investors to accept the share swap option instead as, if we assume a PE of 15 times for the merged entity, E&O Property should trade at RM3.15 per share, a 31% premium to its current share price,” Credit Suisse said.

Deutsche Bank said the restructuring exercise made strategic sense, creating benefits for shareholders and the company.

“First, it aligns all shareholders’ interests at E&O, removes potential share overhang at E&O Property, consolidates both companies to be on a stronger financial footing and removes holding company discounts at E&O.

“We believe E&O Prop shareholders should opt for shares instead of cash given that the cash offer is priced at a 50% discount to RNAV,” it said.

On the full share swap option, every 1,000 E&O Property shares will be exchangeable for 1,100 E&O shares. The 1:1.1 ratio is based on the five-day volume weighted average price of RM2.3808 for E&O and RM2.5222 for E&O Property up to Nov 26.

Under the fixed combination of cash and shares option, for every 1,000 units of E&O Prop shares held, 650 E&O Property shares are exchangeable for 715 E&O shares and the remaining 350 E&O Property shares will be exchanged for RM875 cash.

For the maximised cash option, minority shareholders may get RM2,500 for every 1,000 shares held in E&O Property. Each E&O Prop share is valued at RM2.50, based on the prevailing five-day market prices of between RM2.45 and RM2.61 up to Nov 26.

E&O has ready funding of about RM213 million in the event all minority shareholders of E&O Property opted for the fixed combination option. Hence, it said the cash option was subject to the balance of funding available for the full share swap and after fixed combination options had been determined.

“In any event, the minimum amount for cash redemption will be RM875 for every 1,000 units of E&O Property share. Any balance not redeemed in cash shall be settled by way of share swap in a ratio of one E&O Property share to 1.1 E&O shares,” it said.

Meanwhile, E&O Property Development Bhd and the Lion group announced that they have kicked started their joint development of three blocks of 28-storey luxurious service apartments on the 1.67ha land at the former St Mary’s school site here.


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