Best Mergers & Acquisitions: Creating value for GHL’s shareholders

This article first appeared in The Edge Malaysia Weekly, on December 25, 2017 - December 31, 2017.
Best Mergers & Acquisitions: Creating value for GHL’s shareholders
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THERE were a number of sizeable mergers and acquisitions (M&A) this year, each with its own commendable aspects, making it a tough call to pick a winner.

Still, the best M&A of 2017 will have to be London-based private equity fund Actis’ acquisition of a 44.37% stake in GHL Systems Bhd. While it is far from the biggest deal — it cost Actis only RM290.2 million to acquire the stake — it is recognised as the M&A of the year for the value it created for the company’s stakeholders.

Prior to Actis’ acquisition of the stake via its private vehicle Actis Stark (Mauritius) Ltd, GHL — a leading payment services provider in Asean with operations in Malaysia, the Philippines, Thailand, Australia and Indonesia — had kept a relatively low profile.

The group provides a range of solutions, from physical and internet to mobile payments.

Actis was probably an even less familiar name to the market prior to the deal. However, the private equity fund has a broad range of investments, focused primarily on growth markets.

CIMB Investment Bank Bhd was Actis’ principal adviser for the deal.

Actis has about US$7.8 billion worth of investments spread across private equity and energy to real estate. One of the segments the fund invests in is payment platforms in emerging markets. It has currently invested in payment platforms in Africa, the Middle East and Latin America.

GHL marks Actis’ first foray into Southeast Asia, making it a natural complement to the latter’s portfolio.

In fact, the synergistic aspect of this M&A is what sets it apart from the others. Actis is seen as a strategic partner for GHL, which has already begun to leverage the London-based company’s vast experience and expertise in deploying payment systems across Asean.

GHL currently has over 140,000 points of sale in Asean that are capable of providing credit card, debit card, prepaid contactless payment, prepaid top-up and bill payment services. Currently, its main markets are Malaysia, the Philippines and Thailand.

While Actis’ entry may not have translated into an immediate boost to GHL’s bottom line, the expectation of stronger growth has already been priced in by the market.

Upon the emergence of Actis as a major shareholder, GHL’s share price surged almost 80% above the RM1 per share that Actis paid for its stake in GHL, closing at RM1.78 on Aug 24. The stock has eased somewhat since, closing at RM1.44 on Dec 20.

An interesting aspect of the deal is that while it triggered a mandatory general offer for GHL shares, virtually none of the minority shareholders accepted the offer because it was below the open market price at the time.

In fact, independent advisers told investors not to accept the offer of RM1 per share as it was “not fair and not reasonable”. Actis also made it clear that it had no intention of privatising GHL, preferring to maintain its listing status.

It is also interesting that Actis acquired the block of shares from Tobikiri Capital Ltd, the investment vehicle of GHL executive vice-chairman Simon Loh, and private equity firm Creador.

Loh retained a 19.11% stake in GHL, down from 35.16%, while Creador booked a solid exit return on investment of 2.8 times or an internal rate of return (IRR) of 40%.

While the Actis deal is considered the best M&A of the year, there are two other notable deals that deserve to be mentioned: the acquisition of 51% of Hengyuan Refining Corp Bhd by Shandong Hengyuan Petrochemical Co Ltd (SHPC) and the Employees Provident Fund’s acquisition of 40% of Ekovest Bhd’s highway assets.

While Hengyuan is in the spotlight for its phenomenal share price performance this year — up over 400% year to date at its close of RM14.40 on Dec 20 — it is the synergistic nature of the M&A that earns it a notable mention.

RHB Investment Banking was SHPC’s principal adviser for the takeover. SHPC (through wholly-owned subsidiaries) acquired the 51% stake from Shell Overseas Holdings Ltd. At the time, Hengyuan was known as Shell Refining Co (Federation of Malaya) Bhd.

The entire deal cost US$66.3 million or RM1.92 per share. This worked out to be a great deal for SHPC, given Hengyuan’s share price performance.

However, it is important to note that the share price performance was driven by an improved operating environment that had little to do with the M&A itself. Nonetheless, SHPC should be commended for its timing in executing the deal.

The China-based company is also involved in the manufacture of petrochemicals. It develops, produces, processes and markets diesel oil, liquid gas, propylene and propane, among others. It not only brings technical expertise but also funding for the redevelopment of Hengyuan’s refining operations to accommodate the new Euro 5 standard petrol and diesel.

Meanwhile, the EPF’s acquisition of Ekovest’s 40% stake in Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd (KESTURI) for RM1.13 billion is notable for the risk-mitigating aspects that the retirement fund enjoys in the deal.

Ekovest’s principal adviser was CIMB Investment Bank Bhd while AmInvestment Bank Bhd was the co-adviser. Astramina Advisory Sdn Bhd was the financial adviser for the deal.

It is worth noting that KESTURI holds the Duta-Ulu Klang Expressway concession, both Phase 1 and the newly completed Phase 2 (DUKE 1 and DUKE 2).

Trading in concession assets is always a tricky business, especially when it involves traffic projections for new highways. While the 8km DUKE 1 is an established highway, there is always a risk that the 16km DUKE 2 may underperform.

A key point of the deal is the guaranteed 11.5% IRR that is promised to the EPF by Ekovest. In fact, EPF is withholding RM149 million from the consideration to ensure that it can secure any slippage between the promised IRR and a base 10% IRR. The retirement fund will hold the sum for up to seven years, barring an exit, either via an IPO or a trade sale.

If the IRR is less than 10%, Ekovest will have to pay the EPF the difference out of its pocket.

From Ekovest’s perspective, partially monetising the highways has helped it reduce its gearing substantially — from 1.21 times to 0.38 times — as RM400 million of the proceeds was used to pare down debt.

At the same time, the minorities enjoyed a special dividend — RM244 million or 21.5% of the proceeds was distributed. The balance was used to help Ekovest finance the 32km third phase of the DUKE, or DUKE 3, now known as the Setiawangsa-Pantai Expressway. 

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