This article first appeared in The Edge Malaysia Weekly on September 27, 2021 - October 3, 2021

WHILE most analysts covering flexible plastic packaging producer Daibochi Bhd believe that the privatisation of the company by its largest shareholder Scientex Bhd is a win-win for both parties given the potential synergies to be achieved, some of Daibochi’s minority shareholders seem to have differing views.

On Sept 13, Scientex — one of the world’s largest producers of stretch film products — offered to pay RM2.70 per Daibochi share that it does not already own and 32 sen per warrant not held, for a total of RM345.3 million.

The offer valued Daibochi at RM883.9 million.

When the announcement was made, Scientex held a 61.88% stake in Daibochi, and said that it does not intend to maintain the latter’s listing status once it increases its shareholdings to 90% or more — the stipulated quantum needed to delist in a takeover offer as per Bursa Malaysia’s listing requirements.

In a Sept 16 blog post after the announcement was made, Claire Barnes, an investment manager at AIMS Asset Management who manages the Apollo Asia Fund, wrote, “It (Scientex) has chosen to attempt privatisation, not by offering a compelling price to encourage willing sellers, but by emphasising that companies can be delisted and it would do nothing to prevent this — although with this offer, it seems unlikely to reach the level of voluntary acceptance required for compulsory acquisition.

“Fear can feed on itself, so investors should not relay uncritically the storyline that delisting is inevitable,” wrote Barnes.

Apollo Asia has been a shareholder in Daibochi since 2010, way before Scientex bought a controlling stake in the company in 2018. Before the recent takeover offer was made, it had held a 9.38% stake in the company. Interestingly, checks on Bursa Malaysia show that Apollo Asia had on Sept 15 — two days after Scientex’s offer — purchased 524,300 Daibochi shares at RM2.69 per share, increasing its stake in the company to 31.23 million shares or a 9.54% stake.

On the same date, another fund, Samarang Ucits-Samarang Asian Prosperity, increased its stake in the company from 5.05% to 5.095%. Samarang, which has been invested in Daibochi as a substantial shareholder since 2017 — bought 121,200 Daibochi shares at RM2.69 per share on Sept 15, thus increasing its stake in the company to 16.68 million shares or a 5.095% stake.

The collective shareholding of these two minority shareholders amounts to 14.63%, which could pose a roadblock for Scientex in reaching the 90% threshold required to delist Daibochi should they decide to hold on to their shares.

On its part, Scientex has also been actively accumulating Daibochi shares on the open market since the privatisation announcement was made. From Sept 14 till last Wednesday, it had acquired 13.55 million Daibochi shares at prices ranging from RM2.69 to RM2.70, raising its stake in the company from 61.88% to 66.02%.

When contacted by The Edge, Barnes reiterated the views expressed in her blog post — that it is highly improbable for Scientex to accumulate a 90% stake in Daibochi, given the present shareholding structure.

“We found it very odd to read reports from brokers and press that appeared to assume this as given. We have for years believed that Daibochi has huge potential for long-term growth. We do not have any information on what has happened during the five months since the company’s last report for February to April, and rather limited info since the last annual report for the year to July 2020.

“We took the view that if Scientex wishes to increase its stake at RM2.70, and the best-informed investor sees good value here, it’s also a buying signal for the other investors who have less information.

“We agree with Scientex that the company represents excellent value at RM2.70, and hope that it will remain listed — as per the assurances given by Scientex when it first bought the shares,” she says.

Scientex first acquired a 42.41% stake in Daibochi from several individual vendors who held controlling blocks in the company for RM222.5 million in a share swap deal, which involved the issuance of one new Scientex share for every 5½ Daibochi shares held by the vendors. After a mandatory general offer was launched in 2019, Scientex’s stake in Daibochi increased to 61.88%.

In an earlier blog post, Barnes wrote that when Scientex bought the controlling stake in 2018, it had said that it would not only maintain Daibochi’s listing, but envisaged that it might become the listed flagship for all of Scientex’s packaging interests.

“Allowing Daibochi to grow organically or over time to acquire the other Scientex packaging companies at fair prices, to move all of the group’s packaging companies under a single listed entity, were the two possibilities then envisaged,” she tells The Edge.

Prior to this article, The Edge had asked Scientex CEO Lim Peng Jin about the possibility in the near future of the group relisting Daibochi as a pure plastics player together with Scientex’s plastic business should the privatisation materialise, leaving Scientex’s property business in a separate listed entity.

In an email response, Lim said that there is no proposal for such a corporate exercise at this juncture.

“We deem these two business units as our twin growth engines, and this model has proven to be resilient over the years. The group’s achievement of a 25% compound annual growth rate (CAGR) in net profit over a 20-year period is a testament to the right strategies we have put in place,” he told The Edge.

Private investor and former investment banker Ian Yoong Kah Yin agrees with Barnes’s view that there is upside to Daibochi’s profitability, given that it is a major beneficiary of the consolidation in the flexible plastic packaging industry.

However, he believes that Scientex’s offer at RM2.70 per Daibochi share is good value for minority shareholders who want to cash out.

“A smart strategy for minority shareholders is to accept the offer and invest in Scientex shares. The privatisation exercise will allow Scientex to undertake a comprehensive rationalisation of [Daibochi’s] business and streamline them with Scientex’s operations. I anticipate greater operational efficiencies in expanding the flexible packaging business and further consolidate the Scientex group’s dominant position in the industry,” he says.

Barnes, who has four decades of experience in managing equities in Asia, says that most investors prefer to hold listed shares because of greater transparency and regulated reporting.

“The benefits for society are greatest when companies are encouraged to regard financial investors as long-term partners, and treat them with appropriate consideration for long-term mutual benefit. Threats of delisting force many investors to sell involuntarily, [and] so are inherently unfair.

“In practice, delisting turns most long-term shareholders into forced and distressed sellers,” she says.

Since the announcement on Sept 13, Daibochi shares have appreciated by 13% to RM2.70 last Thursday — which is equivalent to Scientex’s offer price — giving it a market capitalisation of RM883.9 million.

It now remains to be seen whether Scientex will revise upwards its offer price for Daibochi in its proposed privatisation of the latter.

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