WHEN Dayang Enterprise Holdings Bhd launched a mandatory general offer (MGO) for shares in its listed subsidiary Perdana Petroleum Bhd in May, many thought it was a wise move given the current low valuation of oil and gas companies.

The MGO, at RM1.55 per Perdana share, which closed last Thursday, received an overwhelming response, with Dayang now controlling 94.8% of the offshore support services company.

But the outcome may not necessarily be favourable to Dayang and could even be a challenge considering the plan involves keeping Perdana listed as a subsidiary on Bursa Malaysia, which requires a minimum 25% public spread.

Dayang received acceptances of 338 million shares,  89.7% of non-interested shareholding — a whisker away from the trigger point of 90% for a compulsory acquisition, and got 15.12 million warrants from the MGO. All in, this cost Dayang about RM540 million cash to honour the takeover bid.

In a nutshell, Dayang is now loaded with 709.6 million Perdana shares. Thus, Dayang would need to widen the current public spread substantially in order to keep the subsidiary listed on Bursa.

Perdana, meanwhile, announced that the bourse “will suspend trading in all the securities of Perdana immediately upon the expiry of 30 market days from the date of this announcement [made last Thursday] ... The suspension will only be uplifted by Bursa Securities upon Perdana’s full compliance with the public shareholding spread requirements”.

Some sources say Dayang is toying with the idea of privatising Perdana as it just needs to buy an additional 35.9 million shares to do that, and relisting the company at a later date when sentiment is better.

This makes sense, and many companies have taken the same path, including Maxis Bhd, Astro Malaysia Holdings Bhd and Malakoff Corp Bhd.

Meanwhile, Dayang says it “will explore various options or proposals to rectify the public shareholding spread of Perdana or procure Perdana to explore all possible options to rectify the public shareholding spread of Perdana”.

According to the shareholder circular, an extension was granted by the authorities requiring the group to pare down its stake within three months after the closing date of the MGO.

Looking at Perdana’s valuations, Dayang seems to be caught between a rock and a hard place. Dayang may need to dispose of some of its shares in Perdana at a loss, going by the current poor sentiment, particularly for oil and gas stocks amid weak crude oil prices.  Crude prices have dipped below US$50 per barrel after hovering around the US$60 level for several months, a far cry from prices above US$100 per barrel in 2014.

Perdana’s last traded price was RM1.53, considered by analysts to be “artificially high” due to the MGO. However, realistically, it might be tough for Dayang to place out the shares at the offer price, not to mention a higher price, in the near term.

Some substantial shareholders in Perdana, such as its management, have accepted Dayang’s offer, which might be an indicator that they foresee little share price upside potential on Perdana at least in the near term. Dayang also revealed that it intends to have control over the future direction of Perdana, which could explain the substantial shareholders, who were mostly the management, selling.

Checks reveal that Perdana’s competitor Alam Maritim Resources Bhd was trading close to a five-year low of 41 sen last week. Likewise, Icon Offshore Bhd’s shares have hit a record low of 31 sen since its flotation exercise in June last year. Alam ended trading last Friday at 40 sen while Icon closed at 32 sen.

Initially, Dayang’s offer of RM1.55 per share did not appear to be a “bear hug offer” for the minority shareholders, considering Perdana’s RM1.1 billion order book and bright prospects.

Perdana currently has a fleet of 17 vessels — eight anchor handling tugs, seven work barges two work boats with an additional two work barges under construction at a cost of RM270 million. Five work barges and a work boat are deployed to Dayang on long-term charters. 

The average age of Perdana’s vessels is five years and more than half of the fleet is under long-term contracts — some until 2019 — which will help the vessel owner weather the current downturn in the industry.

Nevertheless with the slump in oil prices, Perdana’s earnings have taken a hit.

For its first financial quarter ended March 31, 2015, Perdana posted a meagre net profit of RM8.6 million, giving it earnings per share of almost 1.2 sen.

In contrast to a year ago, net profit was down almost 61% while revenue dipped 17.8%. Perdana says, “The decrease in turnover and profit before tax in the current quarter is mainly due to lower vessel utilisation resulting from the slower work orders/contracts award from the oil majors affected by the decline in crude oil prices.”

Dayang had initially looked at raising RM304.4 million through a placement of 82.5 million shares at an indicative price of RM3.69 in September last year. However, it opted instead to raise only RM175.6 million, issuing 52.1 million shares at RM3.37 apiece.

As at end-March, Dayang had cash and bank balances of RM168 million, which could have helped Dayang accumulate Perdana’s stock.

Dayang has explained that the synergies between the two companies were part of its “expansion strategy and long-term objective of evolving into a market leader for the provision of hook-up construction and commissioning services within the oil and gas industry”.

Despite the seeming uncertainty, AllianceDBS reserch analyst Arnhue Tan says Dayang’s acquisition price at RM1.55 is fine.

“The price [RM1.55] is all right ... in this [soft] market, there could be hard times for maybe two years, but in the long term, it’s a good acquisition. Dayang’s business is stable — brownfield services are the most resilient of the offshore services segment. Basically it’s short-term pain for long-term gains,” Tan says. She has a “hold” call on Dayang and a target price of RM2.85, which is up for review. 

With so many doubts hanging over Dayang’s acquisition, it cannot be denied that the management is shrewd and seems capable judging by its manoeuvrings. Nevertheless, time will tell whether Dayang’s acquisition of Perdana will pay off.

This article first appeared in digitaledgeWeekly, on August 17 - 23, 2015.