This article first appeared in The Edge Financial Daily on May 6, 2019

KUALA LUMPUR: YTL group sprang a surprise  last week and it seems to be a pleasant one. The flagship YTL Corp Bhd announced that its 98%-owned unit YTL Cement Bhd is spending RM1.63 billion to buy a 51% stake in Lafarge Malaysia Bhd from Associated International Cement Ltd, which is currently on a divestment spree in the region.

The acquisition is considered a big deal amid the dearth of major corporate exercises in the past two years.

The transaction price of RM3.75 per share is at a 25% premium to Lafarge Malaysia’s net tangible assets of RM2.99 per share as at end-2018, while standing at 19% above Lafarge Malaysia’s five-day volume weighted average share price of RM3.15 (last Thursday).

The acquisition is likely to cost YTL Cement even more, given that it is required to make a mandatory general offer (MGO) to minority shareholders. The MGO will cost it as much as RM1.56 billion should all minority shareholders accept the offer.

To recap, Lafarge Malaysia’s share price already had rebounded from a 10-year low of RM1.80 in February to RM3.30 last Wednesday before the news. The stock soared to RM3.72 last Friday.

Looking at the three-year share price trend which showed the stock seemingly falling like a rock from RM8 to below RM2 until early this year, the choice is rather obvious for Lafarge Malaysia shareholders, given the premium.

Nonetheless, it is exactly the hefty premium, which YTL Cement is willing to pay, that could prompt Lafarge Malaysia’s minorities to have second thoughts of whether they should hold onto their shares.

YTL group is known for its ability to hunt for good bargains at the right time. Why is the group, which has been in the cement industry for decades and knows that the industry is choked with overcapacity most of the time, willing to pay that high price for Lafarge Malaysia?

One reason is that YTL Cement has the financial muscle and the opportunity for it to be the leading player at present.

The deal was struck between YTL group and Lafarge’s parent company LafargeHolcim Ltd.

“Now that opportunity for

LafargeHolcim to exit Malaysia, YTL has the buying power to purchase the stake,” said an analyst.

According to an AllianceDBS note, YTL Cement and Lafarge Malaysia constitutes about 60% of the domestic cement market.

Some analysts believe that YTL Cement’s offer price of RM3.75 per share is a good deal for shareholders, as it constitutes a 25% premium to Lafarge Malaysia’s net tangible assets of RM2.99 per share as at end-2018, while standing at 19% above Lafarge’s five-day volume weighted average share price of RM3.15 (last Thursday).

Affin Hwang Capital commented that the offer is deemed to be fair, as Lafarge Malaysia has been in the red since 2017, adding that the group has seen negative operating cash flows since then.

It wrote in a note last Friday that the proposed valuation is 1.25 times price to book value (P/BV) and is one standard deviation below Lafarge Malaysia’s five-year mean.

CGS-CIMB Research is also of the opinion that the offer is fair due to Lafarge Malaysia’s loss-making state and a challenging domestic cement market characterised by oversupply, weak demand, competitive pricing and high operating costs.

“In our view, the deal provides an opportunity for minority shareholders to monetise their positions given that an immediate cement demand recovery beyond the revival of the East Coast Rail Link looks unlikely, as other mega projects remain under review,” said CGS-CIMB Research.

Both CGS-CIMB Research and Affin Hwang Capital upgraded the stock to “hold” with a higher target price of RM3.75.

For the financial year ended Dec 31, 2018 (FY18), Lafarge Malaysia’s annual net loss widened to RM319.35 million, from the RM215.16 million net loss posted in FY17. Full-year revenue dropped to RM2.12 billion, from RM2.25 billion posted in FY17.

According to Bloomberg, consensus estimates forecast the group to make RM174 million loss in FY19 and RM21.1 million loss in FY20. This means Lafarge Malaysia is expected to see improving performance moving forward.

In contrast, AllianceDBS research advised minority shareholders in Lafarge Malaysia not to accept the offer while highlighting the acquisition would improve industry dynamics as a whole, which would result in better valuations for Lafarge Malaysia.

“We advise investors not to accept the offer. Assuming Lafarge remains listed, we believe the stock could fetch a higher valuation of RM4.55 — assuming it is valued at 1.7 times book value, equivalent to its three-year P/BV forward mean,” the research house said in a note last Friday.

Despite YTL’s intention to maintain the Lafarge Malaysia’s listing status on Bursa Malaysia, the acquisition triggered an unconditional mandatory offer for the remaining 49% in Lafarge Malaysia.

This means that shareholders now have the opportunity to take up YTL’s offer, and that if the conglomerate receives valid acceptances which result in its aggregated shareholdings of 90%, Lafarge Malaysia could be privatised.

Furthermore, if at the end of the acquisition YTL Cement holds more than 75% or less than 90% of Lafarge Malaysia’s shares, it would not comply with public spread requirements (which require more than 25% of a listed company’s shareholdings to be made available to the public).

Lafarge’s other substantial shareholders are Amanah Saham Bumiputra controlling 8.99% and FIL Ltd holding 6.41% or 54.47 million shares in the group. It would be interesting to see if the two intend to stay on.