MGO exemption for UMW-OG is ‘fair and reasonable’, says Mercury Securities

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KUALA LUMPUR (Aug 3): The proposed exemption sought by UMW Oil & Gas Corp Bhd’s (UMW-OG) major shareholders Permodalan Nasional Bhd (PNB), Amanah Saham Bhd (ASB) and persons acting-in-concert (PACs), from undertaking a mandatory general offer (MGO) for the remaining shares and warrants in the group is considered to be “fair and reasonable”.

In a letter filed with Bursa Malaysia today, independent adviser Mercury Securities Sdn Bhd is advising UMW-OG's minority shareholders to vote in favour of the proposal at the group's extraordinary general meeting on Aug 25.

“The proposed exemption, if granted, will allow UMW-OG to undertake a recapitalisation exercise,” said Mercury Securities.

UMW Holdings Bhd is distributing its 55.7% shareholding in UMW-OG to its shareholders, as part of its plan to exit the oil and gas industry. This will result in PNB and the PACs holding a combined 45.47% stake in UMW-OG, which will in turn trigger an MGO.

The recapitalisation exercise proposed by UMW-OG entails a rights issue of up to 6.05 billion rights shares on the basis of 14 rights shares for every five UMW-OG shares at 30 sen apiece, together with up to 1.51 billion free warrants on the basis of one warrant for every four rights shares subscribed — at an exercise price of 39.5 sen. This will raise RM1.82 billion, which will be used to pare down its debt. 

PNB has agreed to take on its full allocation and to absorb any unsubscribed rights issue without resulting in its shareholding exceeding 65%. In such event, the remaining unsubscribed rights will be converted into Islamic redeemable convertible preference shares (RCPS-i).

Mercury Securities said the recapitalisation exercise serves to reduce the group’s reliance on debt financing, which has grown significantly post UMW-OG’s initial public offering in end-2013.

"However, it has not undertaken any equity fund raising exercise to raise proceeds for its capital expenditure and/or working capital requirements, thus contributing to a high gearing level," said Mercury Securities.

The independent adviser also noted amid current difficult economic conditions and a low charter rate environment, it is essential for the group to be cost competitive and to maintain a level of operational sustainable cashflow, taking into consideration an amount of approximately RM1.5 billion is to be repaid by end-2017.

"Premised on our overall assessment of the proposed exemption on a holistic basis, we are of the opinion that the proposed exemption is fair and reasonable," Mercury Securities added.

The independent adviser noted the exercise will see UMW-OG’s net gearing reduced from 1.88 times as at March 31, 2017 to 0.64 times. As at March 31, UMW-OG had short-term borrowings of RM1.51 billion and long-term debts of RM2.49 billion.

At 4.42pm, UMW-OG shares were traded unchanged at 29 sen, with 12.35 million shares traded, giving it a market capitalisation of RM637.79 million.