INVESTORS were surprised by the quick about-turn made by First Pacific Co Ltd, which aborted its planned takeover of candy manufacturer Cocoaland Holdings Bhd barely six weeks after making its initial proposal.

First Pacific’s offer of RM463.32 million, or RM2.70 per Cocoaland share, seemed to reflect the company’s strong growth potential and healthy balance sheet.

While Cocoaland’s fundamentals remain solid, the minority shareholders of Cocoaland (fundamental: 2.80, valuation: 2) would be rightly concerned about the recent turn of events, particularly as the latest takeover proposal marks the third time this year the group’s controlling stakeholder, the Liew family, has entertained offers from external parties.

To recap, in April, the group disclosed that it had been in preliminary discussions with Swedish private equity firm EQT Partners AB on a possible stake sale, which ultimately did not materialise. Then, on May 22, it announced the receipt of a non-binding offer from Navis Asia VII Management Co Ltd at a consideration price of RM2.20 per Cocoaland share. The company’s board of directors swiftly and unanimously rejected the offer on May 25.

With the Liew family, led by founder and executive director Liew Fook Meng, now back to square one, questions are raised on whether it is acting in the best interests of its minority shareholders. It is not known whether the board had advance knowledge of First Pacific’s intention at the time when it rejected Navis Capital’s offer.

News of First Pacific’s aborted deal sent Cocoaland share’s plummeting to as low as RM2 on July 20. However, the stock swiftly recovered to close at RM2.35 last Thursday.

One of the key standouts of First Pacific’s proposal is that it intends to retain Cocoaland’s management team after the takeover. This will be done via a special purpose vehicle (SPV) whose shareholding is shared between First Pacific and Leverage Success Sdn Bhd, which holds a 38% stake and serves as the Liew family’s investment vehicle.

“Liew had previously mentioned that First Pacific is keen for the managers to continue at the helm of Cocoaland for several years. However, at the same time, the family is equally keen to cash out and retire from the company. All things considered, such a deal sounded like a no-go from the very beginning,” says a food and beverage industry analyst.

The reason given for First Pacific’s cancellation was that Cocoaland’s product range is less strategically beneficial than the conglomerate initially expected.

“If the existing management was unwilling to stay for a few years, this should have been communicated clearly to First Pacific. This non-binding proposal with a stated price only had the effect of pushing up the stock despite the offer not being concrete,” adds the analyst.

The offer price of RM2.70 per share serves as an indication of what the Liew family considers as a fair valuation for Cocoaland, given that it would have undertaken the takeover alongside First Pacific via the SPV.

First Pacific’s rationale for pulling out may be construed as a lack of confidence in Cocoaland’s in-house brands. In Indonesia, Cocoaland derives most of its sales as an original equipment manufacturer (OEM) or as a producer of candy for other brands.

For the first nine months of its financial year ended Sept 30, 2014 (9MFY2014), the company reported RM19.03 million in OEM sales in Indonesia. In comparison, its own brands sold for only RM1.59 million.

On the other hand, Cocoaland’s own brands performed strongly in China and Saudi Arabia, with sales of RM19.16 million and RM11.46 million respectively for 9MFY2014. It has zero OEM presence in both countries.

Its weak Indonesian presence could have been the deal-breaker for the Salim group, as the promotion of Cocoaland’s in-house brands in the country would require further expenditure in marketing. Competition is also expected to be stiff, particularly as it would have to compete with prominent international brands in the confectionery segment.

Hong Kong-based First Pacific is controlled by Indonesian tycoon Anthony Salim and has wide-ranging interests across Southeast Asia, including in the food, telecommunications and infrastructure sectors. The conglomerate has been on an acquisition spree this year. Together with Wilmar International Ltd, it took over Australia’s biggest food manufacturer Goodman Fielder in a US$1.3 billion deal earlier this year.

Additionally, it also bought a majority stake in Philippines-based Roxas Holdings Inc, which is one of the country’s largest sugar millers for US$37.4 million in March.

First Pacific’s shareholders seem to be wary of the group’s free-spending ways, which could have potentially scuttled the Cocoaland deal. According to The Wall Street Journal, more than two thirds of First Pacific’s minority shareholders voted against the reinstatement of its existing directors during the group’s annual general meeting on June 3.

Despite the opposition, the directors were duly re-elected, thanks to the voting power of parties controlled by Salim.

The worsening investor sentiment in First Pacific is also reflected in its share price. To date, the stock has fallen 18%, underperforming Hong Kong’s broader market.

That being said, Cocoaland remains an enticing takeover prospect, thanks to its growing sales and substantial cash inflows. According to InsiderAsia Research, which counts the stock as one of its top portfolio picks, the company was able to spend some RM100 million in capex over the past five years but still saw net cash increase without undertaking substantial borrowings.

“Their growing cash pile indicates an upside potential in dividends, and its yields could appreciate. It is also a beneficiary of both the weak ringgit due to its exporter status, and lower commodity prices, which lowers its raw material costs and improves overall margins,” it says.

InsiderAsia adds that the recent selldown presents a good buying opportunity for Cocoaland’s shares. At present prices, it carries an attractive trailing 12-month earnings multiple of 14 times, it says.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

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