This article first appeared in The Edge Malaysia Weekly on November 6, 2017 - November 12, 2017

COME Nov 20, Goldis Bhd’s minority shareholders are expected to meet, vote and approve the privatisation of IGB Corp Bhd, putting in motion the final part of the group’s massive restructuring exercise that began more than five years ago.

The next day, IGB Corp’s shareholders will meet at a High Court-convened meeting to decide whether to accept an offer that values the group at RM3 a share.

Interestingly, IGB Corp’s shares are currently trading at only RM2.81. This presents a narrow but not insignificant discount of 6.8%.

For savvy investors who bought IGB Corp shares at RM2.80 or RM2.81 last week, they will easily book in a nearly 7% gain come next February, when the proposed scheme is expected to be completed, if all goes well.

That is quite a gain, potentially, in less than four months, assuming, of course, that the shareholders accept the offer.

On top of that, the said investors will have to opt for the first of three options presented by Goldis.

Recall that Option 1 entitles IGB Corp shareholders to RM3 in cash per share.

Option 2 entitles them to a 30% payout (90 sen per share) in cash and the balance in Goldis shares, at RM3 apiece.

Option 3 entitles them to an 12% cash payout (36 sen per share) and the balance in seven-year redeemable convertible cumulative preference shares (RCCPS) at RM3.28 each.

The RCCPS has a one-for-one conversion rate and pays a preferential 4.3% dividend per annum.

Interestingly, independent adviser Kenanga Investment Bank found the offer to be reasonable, but noted that Option 1 was not fair.

This is because the revised net asset value of IGB Corp is RM6.95 per share. The offer comes at a 56.8% discount.

However, Options 2 and 3 were considered fair due to the relatively low resultant exchange ratio.

Large institutional shareholders are expected to opt for Options 2 and 3 if they plan to stay invested in the group. Theoretically, shareholders can opt to collect the cash and subsequently, accumulate shares in the merged and enlarged entity.

Last Thursday, Goldis’ shares closed at RM2.75.

On a side note, at RM2.81 a share, the hypothetical yield is higher than 4.3%. Including the 12% cash payout, the net yield is 4.65%.

It is worth noting that yield-seeking investors could also opt for Option 1 and use the proceeds to invest in IGB Corp’s 49.42%-held cash-cow subsidiary, IGB Real Estate Investment Trust. Based on last Thursday’s closing price of RM1.64, IGB REIT is being valued at a dividend yield of 5.34%.

This creates some interesting considerations for Goldis. Despite being “not fair”, Option 1 may see a high number of take-ups by investors who have decided to arbitrage the scheme.

Of course, the enlarged entity is more than capable of funding such a scenario.

“It is highly unlikely, but even if there is a 100% take-up of Option 1, we can fund it. We have prepared the necessary facilities and we don’t need to raise funds to refinance debt associated with the privatisation of IGB,” says Goldis executive director Colin Ng.

It is interesting to note that Goldis already controls 73.73% of IGB Corp following an earlier corporate restructuring exercise that saw the controlling shareholders — the Tan family — consolidate their ownership of the group at the Goldis level.

The tightly held shareholding has made the shares of IGB Corp relatively illiquid. Thus, it should be noted that it may be challenging for investors to accumulate a sizeable position to arbitrage.

Looking ahead, however, it is also interesting to consider the potential value of the enlarged group post-exercise. Recall that the combined entity will be renamed IGB Bhd, which stands for Ipoh Goldis Bersatu.

The catalyst for Goldis will come in two parts. Firstly, the removal of the holding company discount should boost Goldis’ share price.

Ng points out that simplifying the group structure and removing the holding company discount are the key goals of the exercise.

Another catalyst would be that it will acquire the remaining 26.27% stake in IGB Corp at a relatively low price. In fact, analysts have valued post-exercise Goldis at as much as RM4 per share.

Of course, it remains to be seen if the market will continue to value Goldis at a discount post-exercise.

At the very least, IGB Corp should be trading closer to RM3 per share if the scheme is approved.

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