This article first appeared in The Edge Malaysia Weekly on December 27, 2021 - January 2, 2022

THE timing was just right for the major shareholders of Kwantas Corp Bhd to launch the privatisation of the plantation company. Crude palm oil (CPO) prices were low, Covid-19 had hampered its operations, the company had been in the red for three consecutive years and it had huge short-term borrowings.

The estate of the late Kwan Ngen Chung (KNC), which is the major shareholder of Kwantas, took the opportunity to take the Sabah-based company private and since then, CPO prices have been on an upward trend.

In August last year, when CPO prices were still hovering below RM3,000 per tonne, the estate of KNC made an offer to privatise Kwantas through a selective capital repayment (SCR) exercise.

The major shareholders and parties acting in concert already held 61.5% equity interest. They needed to mop up the remaining shares, which amounted to less than 39% of the company.

The biggest challenge in any SCR exercise is to get the necessary approvals from shareholders, which can be difficult for companies that have a small capital base. That is because under the SCR, 75% of the shareholders who are not acting in concert with the major shareholders have to agree to the deal at a specially convened meeting.

And more importantly, there cannot be more than 10% of shareholders who oppose the deal. In past SCR exercises, there have been instances where the deal did not go through because more than 10% of shareholders opposed the deal as they felt the offer price was not attractive enough.

Kwantas had 311 million shares and the top 10 shareholders held more than 80% of the company. All it would take was a group of shareholders holding 31 million shares to stop the deal.

But the offer price to take Kwantas private via the SCR route came up to RM1.65 per share, which was a huge premium over the prevailing market price of 55.5 sen.

Moreover, Kwantas, which also has bulking installation facilities and oleochemical operations in China, had been loss-making since the financial year ended June 2018. The company had said global uncertainties and local environment issues were expected to influence the future prices of and demand for CPO and would continue to bog down its performance.

The major shareholders, in wanting to take the company private, had also said that 62% of the plantations under the group were planted with trees of more than 16 years old and it would need to incur major capital expenditure to undertake a replanting exercise. Toward this end, it hinted that it was possible the company would not be able to make dividend payments in the future as it would have to incur bank borrowings, while the production of fresh fruit bunches would be affected.

The offer price of RM1.65 per share to take Kwantas private was low if one compared it with the underlying value of the stock. The net assets per share stood at RM3.64.

However, the company had huge short-term debts and only RM60.1 million cash. Its debts amounted to RM475 million, of which RM464 million was due within a year.

The SCR exercise was launched in August 2020 and three months later, the shareholders had already approved the deal. By March 2021, the deal was completed and the shareholders had already received their money.

CPO prices, however, have been on the rise since, which is good for the estate of KNC. The commodity being at more than RM5,000 per tonne was something nobody would have expected.

A notable mention among the privatisation deals of the year is that of Amanah Harta Tanah PNB Bhd (AHP).

Permodalan Nasional Bhd (PNB) is easily the largest owner of property assets in the Klang Valley. But for all the properties under its stable, its real estate investment trust (REIT) is the smallest among similar companies listed on the stock exchange.

AHP is one of the oldest REITs in the country, having listed in 1989. It has only four properties in its portfolio, which are valued at RM457.5 million. They comprise mainly purpose-built office buildings that offer a net lettable area of 778,045 sq ft.

The REIT was listed at RM1 per unit and had been distributing all of its income. The net asset value per unit stood at RM1.27.

Because of the weak property market, especially for office buildings and retail space, AHP’s unit price had been trending below RM1 since 2015. Its prospects took a turn for the worse last year when the pandemic hastened the pivot towards a hybrid work environment. Going forward, most employees would likely work two or three days a week in the office, hence there would be less demand for office space.

Given the bleak prospects, PNB launched the privatisation of AHP at RM1 per unit under a selective unit redemption scheme in September last year. The offer price was more than a 40% premium to the last traded market price of AHP.

The healthy premium for the REIT was a no brainer for unitholders who accepted the offer. The scheme was completed within five months without any hiccups.

It is easy to fathom why unitholders would readily exit AHP. It is small relative to other REITs. Issuing units to acquire other properties to grow its asset size would give rise to a dilutive effect and would probably not add any value for unitholders. Moreover, the office segment of the property market is not exactly a place where investors would want exposure to, considering the huge supply that is coming into the market next year.

As for PNB, a delisting of AHP has reduced the challenges it would face in restructuring the REIT and portfolio of properties under the group.

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