KUALA LUMPUR: Hong Leong Financial Group Bhd (HLFG) has made an unconditional offer to take its investment banking arm private.

HLFG said in a statement to Bursa Malaysia yesterday it had made a cash offer of RM1.71 per share for all outstanding shares it does not own in subsidiary Hong Leong Capital Bhd (HLCap) following the suspension of both counters last Friday.

This confirmed a story published by The Edge weekly over the weekend.

HLFG owns 79.09% of HLCap, the holding company of Hong Leong Investment Bank Bhd. HLFG also owns a 66.13% stake in Hong Leong Bank Bhd (HLBB), the group’s commercial banking arm.

The offer for HLCap values the company at just slightly over one times book value of RM1.70 per share as at Sept 30 and will cost HLFG RM88.04 million for the remaining 20.91% stake.

While the offer is on par with HLCap’s book value, it is at a 33.59% premium to the counter’s one-month volume weighted average price (VWAP) of RM1.28 and a 41.32% premium to its six-month VWAP.

Market observers said HLCap’s low public shareholding spread has constrained the stock’s trading liquidity and is the main reason for the underperformance of the shares.

HLCap has not paid any dividends since 2010 despite being profitable, resulting in poor investor interest. The company has been keeping its profits to fund business expansion.
HLCap’s minority shareholders will have 21 days to mull over the offer, barring an extension by HLFG.

Market observers said a relatively small number of HLCap’s minority shareholders could block HLFG from acquiring all outstanding shares due to the concentration of shareholding among the minorities.

For compulsory acquisition, HLFG would need at least 90% acceptance or 46.34 million HLCap shares out of the 51.49 million shares targeted.

This won’t be an easy task as HLCap’s top 30 shareholders (not including HLFG and shares held in trust for the employees share option scheme) hold 10.74 million shares in the company. At least half of the shareholders will have to accept the deal for HLFG to proceed with the compulsory acquisition.

Having said that, HLFG does not need to compulsorily acquire all the shares before it can privatise HLCap.

Thus, minority shareholders who are not satisfied with the offer may risk holding shares in a privatised outfit, as HLFG does not plan to maintain the listing status of HLCap.

This article first appeared in The Edge Financial Daily, on Jan 15, 2013.