Frankly Speaking: Lack of premium

This article first appeared in The Edge Malaysia Weekly, on November 19, 2018 - November 25, 2018.
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Last Wednesday, Scientex Bhd announced a plan to acquire a 42.21% stake in Daibochi Bhd — a Melaka-based flexible packaging manufacturing firm — from 14 of the latter’s shareholders for RM222.5 million.

The vendors include former executive director Low Chan Tian, who has a 10.32% stake in Daibochi, Lim Koy Peng (8.46%), Datuk Wira Wong Soon Lim (5.43%) and executive director Geoff Low Jin Wei (4.18%).

Following the announcement, shares of Daibochi fell 29 sen apiece or 14.5% to close at RM1.70 last Thursday, making it the fourth-largest decliner on Bursa Malaysia. Scientex, on the other hand, closed at RM8.84 apiece for a 17 sen, or 1.96%, gain, making it the day’s 11th-largest gainer.  In other words, Scientex shares reacted positively to news of the acquisition whereas Daibochi shares reacted negatively.

According to the heads of agreement, Daibochi’s shareholders would swap 5.5 of their shares for every one new share to be issued in Scientex, an industrial packaging materials manufacturing giant.

While the transaction is between a willing buyer and willing seller, note that at RM1.60 per share for 139.06 million shares in Daibochi, the offer price represents an 18.8% discount to Daibochi’s five-day weighted average share price of RM1.97.

That said, MIDF Research pointed out that the purchase consideration by Scientex values Daibochi shares at a historical price-earnings ratio (PER) of 20 times and price-to-book value (PBV) of 2.62 times — higher than Daibochi’s 10-year average of PER at 17.1 times and PBV at 2.3 times.

It is worth noting that the collective shareholding of the 14 Daibochi shareholders in Scientex is estimated to be around 4.9%, so they are likely to lose influence in the business.

This raises the question as to why a controlling premium was not paid to the 14 shareholders by Scientex, which will become the largest shareholder in Daibochi.

While most research analysts view this deal positively in the long run, it is Daibochi’s minority shareholders who will suffer short-term pain.

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