Killing the goose that lays the golden egg
The major shareholders of Emivest Bhd and Leong Hup Holdings Bhd launched takeover bids for the two companies via the assets and liabilities route last week. The Lau family offered to acquire all the assets and liabilities of Emivest for RM108 million. Of the amount, RM46.4 million is to be paid in cash and RM61.6 million in deferred payments.

A similar exercise is proposed for the assets and liabilities of Leong Hup, for which the Lau brothers are proposing to pay RM318 million — RM169.7 million in cash and RM149 million in deferred payments.

If the proposal is approved, both companies will be cash-rich and without core businesses. The major shareholders, who also sit on the boards, say the cash will be distributed to shareholders following the disposal of assets and liabiities.

The Lau family, which controls 57.08% of Emivest and 46.74% of Leong Hup, proposes to use its portion of the cash distribution to settle the amount owed to the minorities.

This proposal gives rise to several issues.

First, if the cash distribution exercise is not approved, the major shareholders say they will settle the deferred amount in cash within 12 months with interest. But what happens if they are unable to fulfil their obligations?

Secondly, Emivest and Leong Hup will fall into the PN17 category following the takeover as both will be without core businesses and cash as the money will be distributed to shareholders. So, where is the companies’ financial muscle to acquire new businesses?

There is always the possibility of new assets being injected in return for shares or the companies can be wound up. But is this what the minorities want?

The cash distributions do not seem to reflect the full valuations of Emivest and Leong Hup. But then, that is to be expected as the major shareholders would not embark on such an exercise if there is no benefit for them.

Which brings us to the final question: how will the Lau brothers convince the minorities to accept the deal, especially when one of the companies, Emivest, is profitable and has declared a four sen dividend for several years now. Watch this space.

Guessing the price tag
It is puzzling why the board of directors of QSR Brands Bhd did not disclose the details, especially the pricing, of a proposal from Tan Sri Halim Saad and Datuk Che Mokhtar Che Ali to acquire the entire business and undertakings of the company.

Without providing any guidance on the price, the shares of Kulim (M) Bhd, QSR and and its unit, KFC Holdings (M) Bhd, should ideally remain suspended to avoid excessive speculation.

To recap, the stocks of Kulim, QSR and KFC were suspended from 9.30am last Friday in view of a pending announcement. Later in the evening, QSR announced to Bursa Malaysia that it had received a “preliminary proposal” a day earlier (last Thursday) from AmInvestment Bank Bhd and Newfields Advisors Sdn Bhd on behalf of Idaman Saga Sdn Bhd, whose shareholders are Halim and Che Mokhtar, to acquire QSR’s entire business and undertakings.

QSR said its board “is in the midst of deliberating the proposal and will make further announcements in due course”.

Instead of a mere two-paragraph statement, shareholders would expect more. And between Nov 18, when the proposal was received, and the evening of Nov 19, there should have been enough time for the QSR board to deliberate the “preliminary proposal” from Halim and announce some details.

The announcement, without details, by all three companies merely adds to the speculation of an impending boardroom tussle for QSR and its prized possession KFC. Whatever the case, shareholders should be told what the proposal from Halim was all about — even if it is to be rejected by the board.

Step up soft infrastructure growth
The World Bank’s newly released report, Malaysia Economic Monitor November 2009, confirms what is now a patent reality — the country’s weak points are showing and it needs to work really hard to get back on the growth path. Foremost among these changes is the much-awaited switch from physical infrastructure development to soft infrastructure. As the Malaysia Investment Climate Assessment Update Report 2009 shows, based on the perceptions of firms in manufacturing and business support services, firms continue to believe that a shortage of skills is the top obstacle. About 40% of participating firms reported this as one of their top three constraints, along with high taxes or onerous tax rules and the lack of business support services.

Malaysia was ranked 48th out of 145 countries on the World Bank’s Knowledge Economy Index 2009 and has roughly remained in this position since a decade ago. A comparison with high-income and other East Asian economies suggests that Malaysia lags somewhat in the areas of innovation and education.
Over 70% of firms in the manufacturing and services sectors surveyed in 2002 and 2007 indicate that one of the top three most important causes of job vacancies is that applicants do not have the required basic or technical skills.

The available data also suggests a high level of income inequality. For example, household income data from 2004 suggests that the bottom three deciles of income distribution each account for less than 5% of total income. The preferred change would be to pull the workforce towards skills training so they will command higher wages.

This article appeared in Corporate page of The Edge Malaysia, Issue 833, Nov 22-28, 2010