This article first appeared in The Edge Financial Daily on November 22, 2017

KUALA LUMPUR: Plastic injection mold manufacturer Denko Industrial Corp Bhd has signed a conditional share sale agreement (SSA) with its largest shareholder and executive chairman Datuk Seri Foo Chee Juan and a person connected to him, to buy rival Integrated Manufacturing Solutions Sdn Bhd (IMS) for RM1.19 billion.

The SSA follows a heads of agreement inked on Oct 23 between Denko as the buyer and Foo and Datuk Fong Chiu Wan, both co-owners of IMS, said Denko in a filing yesterday.

The related party transaction, said Denko, will be satisfied via the issuance of 107 million new shares and 925.1 million rights of allotment of new Denko shares at RM1.15 apiece.

The price per share is at a 9.5% discount to the volume-weighted average market price of Denko shares for the five-day period ended Oct 20 of RM1.2707 per share.

The purchase consideration is based on a 15 times multiple of IMS’ profit after tax (PAT) for its financial year ended March 31, 2017 (FY17). “The acquisition price-earnings ratio (PER) multiple represents a discount of 12.28% to the simple average PER multiple of the comparable companies,” said Denko.

IMS made RM79.13 million in PAT for FY17, on the back of RM1.81 billion in revenue.

Concurrently, Foo’s 99.99%-owned Oregon Technology Sdn Bhd — which holds a 50.22% stake in Denko and which will be designated by Foo and Fong to receive part of their shares and rights of allotment under the IMS acquisition — will place out up to 232 million Denko shares to third-party investors to be identified.

The proposed placement is to ensure Denko complies with the public spread requirement following the acquisition. The two exercises will see Denko’s public shareholding spread reduced to 25.08% from 49.78% now.

Foo emerged as the largest shareholder of Denko via Oregon Technology following the latter’s takeover offer for Denko in February at 55 sen a share.

Post-acquisition, post-placement and upon exercise of the rights of allotment, Oregon Technology’s stake in Denko will be trimmed to 36.38%, while Foo will have 42.37% — of which 5.57% will be directly held — and Fong will have 32.97%.

Meanwhile, Denko announced that it returned to the black in the second quarter ended Sept 30, 2017 with a net profit of RM269,000, as opposed to a net loss of RM18,000 a year ago, as manufacturing contribution improved as its tooling subsegment suffered lower losses and Indonesian operations booked stronger gross profit. Revenue strengthened 28% to RM28.95 million from RM22.7 million.

Trading of Denko shares, suspended from 4.25pm yesterday to make way for the announcement, resumes today.