Dissecting the fight for Lay Hong

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IN just two days, QL Resources Bhd has mounted a lightning-quick counter-offensive on the Yap family by proposing a voluntary general offer to wrest control of Lay Hong Bhd, following Chia Mak Hooi’s removal from the board.

With an attractive offer of RM3.50 a share, minorities stand to benefit the most from the tussle between the Chia family, which now has a 29.95% stake in Lay Hong through QL Resources, and the Yap family, which has a combined 43.37% stake.

The two families could end up in a lose-lose stalemate if neither party sells out, given that QL Resources has no intention of maintaining the listing status of Lay Hong if the deal goes through. However, it appears that the Chia family, with QL Resources’ stronger balance sheet, could have an advantage despite having a smaller stake in Lay Hong.

To recap, at Lay Hong’s annual general meeting on Sept 22, shareholders opted not to re-elect Mak Hooi to the board. He is also an executive director of QL Resources as well as the nephew of founder and group managing director Chia Soong Kun.

The Yap family and some minority shareholders, representing 62.92% of the voting shares that were present, voted against the resolution to re-elect Mak Hooi. QL Resources abstained from voting, but its 13.42 million shares, which represented only 36.9% of the votes, would not have been able to pass the resolution.

It is not clear what led to the ouster of Mak Hooi from Lay Hong’s board. Some say it could be disagreement over plans for a corporate exercise.

In response, the Chia family, with RHB Investment Bank Bhd as its merchant bank, put together a voluntary general offer in a record two days. The offer is conditional on QL Resources’ securing at least 50% of all outstanding voting shares.

At the time of writing, QL Resources had acquired an additional 1.5 million shares, bringing its total holding to 14.92 million shares, or 29.97%. To hit the 50% threshold, QL Resources will have to secure acceptances of 9.97 million shares, or another 20.03%.

In this minimum scenario, QL Resources will have to fork out RM34.9 million for the acquisition, increasing its net gearing from the current 0.37 times to close to 0.4 times.

Unsurprisingly, the Yap family is widely expected to reject the offer, following the hostile manner in which QL Resources’ representative was removed from Lay Hong’s board.

Nonetheless, QL Resources’ goal of securing more than 50% of the voting shares seems achievable, as the Yap family and the shareholders who voted against Mak Hooi’s re-election constitute only 45.96% of the share base. Simply put, the Chia family only needs to convince 74% of the “neutral” shareholders who hold a combined 13.5 million shares to accept.

For the minorities at least, the decision will be relatively simple — hope for a counter-offer from the Yap family or simply accept the offer, which is 91.26% higher than the 12-month volume weighted average price and 38.89% higher than the five-day VWAP.

Naturally, a premium is to be expected for a general offer to succeed, but the offer values Lay Hong at a whopping 20 times trailing 12-month earnings and 1.4 times book value, the highest in the industry. In comparison, other poultry players have an average price earnings multiple of 11.8 times.

On the other hand, although Lay Hong’s share price managed to hit a high of RM3.60 following the offer, the fact that it had settled at RM3.45 last Friday is a relatively good indicator that the minorities aren’t betting on a counter-offer.

For the share price to exceed RM3.50, investors would have to be convinced that the Yap family has the financial muscle to mount a counter-offer, especially since Lay Hong’s management, headed by group managing director Yap Hoong Chai, clarified in an announcement to Bursa Malaysia that the board had decided not to seek an alternative person to make a takeover offer for the shares.

The board is expected to appoint an independent adviser for Lay Hong’s minorities.

The ball is now in the Yap family’s court, but its options are limited. The most likely outcome will see Lay Hong delisted, with QL Resources in control of more than 50% of the shares, albeit with a hostile and substantial minority in the company.

This would be a lose-lose situation for both families.

This will occur if the Yap family neither accepts the offer nor makes a counter-offer. In this case, QL Resources would be able to take control of the board and put in its management team, much to the detriment of the Yap family. However, QL Resources may be unable to undertake certain actions such as related party transactions in which interested parties are not allowed to vote.

QL Resources supplies raw feed to Lay Hong, which amounted to RM40.21 million since the previous AGM in 2013. It is interesting to note that the shareholders passed the resolution to renew the recurring related party transactions of up to RM80 million until the next AGM, so there would be little impact on QL Resources for now.

Meanwhile, the Yap family would be stuck with an almost 44% stake in a company in which it has no management control, and there is no easy way to sell out.

In such a situation, a shrewd businessman in QL Resources’ position would take the opportunity to put out huge amounts of rights issue with lots of free warrants. QL Resources’ larger balance sheet would allow it to fund the rights issue while diluting the Yap family’s position. Otherwise, a few placements to friendly parties would also achieve the same effect.

It is worth noting that such an outcome can be avoided if the Yap family simply accepts the offer.

However, after running the business for over four decades and two generations, being forced to sell out could be a bitter pill for the Yap family to swallow, even if it would pocket RM75.6 million for its troubles.

Left: It could be a bitter pill for Lay Hong group managing director Yap Hoong Chai and his family to swallow if they are forced to sell out. - Photo by Suhaimi Yusuf
Right: Mak Hooi was removed from Lay Hong’s board
- Photo by QL Resources Annual Report

In this situation, QL Resources would have to fork out an estimated RM127.3 million for the full privatisation of Lay Hong. This would increase its net gearing to 0.46 times.

Still, the Yap family could make a counter-offer but that would be expensive, especially since QL Resources is already offering such a high premium.

On top of that, Lay Hong, as a company, would find it difficult to fund the privatisation internally. The group’s balance sheet is heavily geared at 1.32 times, meaning the Yap family would find it hard to take on more borrowings to fund an offer.

Meanwhile, the company has a weak cash flow despite being profitable with a net outflow of RM2.4 million in the past year. Thus, the Yaps will not be able to use the company’s cash flow to service borrowings for a counter-offer.

This article first appeared in The Edge Malaysia Weekly, on September 29 - October 5, 2014.