PERAK CORP BHD, the public-listed development arm of the Perak government, is likely to face an unhappy group of minority shareholders again at an extraordinary general meeting (EGM) to be held on March 27.
The EGM is to let shareholders vote on the proposed sale of the group’s 15.74% stake in Integrax Bhd to Tenaga Nasional Bhd for a total of RM150.31 million or RM3.25 per Integrax share.
Perak Corp’s minorities could be unhappy because the board doesn’t plan to distribute any of the sale proceeds to shareholders, but intends to fully utilise them for working capital and repayment of borrowings.
What’s more, despite an EGM being convened, minorities don’t have much say because state entity Perak State Development Corp (PKNP) controls some 52.9% of Perak Corp.
Since it is not a related-party deal with Tenaga, PKNP alone could vote in favour of Perak Corp selling the Integrax stake.
For the proposed sale to go through, Perak Corp needs at least 50% plus one share from shareholders.
The indications are that PKNP will support the deal. Perak Corp’s board, with representatives linked to the Perak government, had on Feb 26 announced its decision to recommend that its shareholders accept the revised offer from Tenaga.
The initial offer was RM2.75, but it was revised to RM3.25, following the suggestion of Perak Corp to Tenaga.
Perak Corp’s minorities may want a higher price from the Integrax deal. In a March 4 statement, M&A Securities, which is acting as an independent adviser to the takeover offer, described the revised offer of RM3.25 as not fair. M&A values each Integrax share at between RM3.60 and RM3.66.
The Integrax deal aside, it is worth noting that Perak Corp’s minorities have just had a run-in with PKNP, which tried to privatise Perak Corp at RM3.90 per share via a selective capital reduction exercise late last year.
Owning to the objection of the minorities, notably Sime Darby Property Bhd, which owns a 6.12% stake in Perak Corp, PKNP was forced to abort the privatisation exercise, which was said to have undervalued Perak Corp.
Back to the Integrax deal, one representative of a minority shareholder group in Perak Corp said, “It is unfortunate that minorities will not have a say in this stake sale given PKNP’s majority position.”
“With no special dividend at all [from the sale proceeds], a more sceptical shareholder would perceive this as a ‘punishment’ for minorities for blocking the privatisation exercise [by PKNP last year].”
According to Perak Corp’s board, the proposed sale proceeds of RM150.31 million will go towards enhancing the group’s balance sheet, with RM77.69 million to be utilised for working capital, and RM72 million to repay borrowings.
The group holds cash of RM107.56 million as at Dec 31, 2014, with total borrowings of RM104.92 million. With the repayment, its debt will come down to RM32.92 million, and cash level increase to some RM186 million.
Minus the remaining debt, Perak Corp will have a net cash position of RM153 million, compared with its current market capitalisation of RM307 million at its share price of RM3.03 last Thursday.
The proposed sale of the Integrax stake would also enable Perak Corp to book a net gain of RM52.3 million from its investment, hence improving its net asset value per share to as high as RM5.70 from RM5.14 at present.
However, this will further widen the discount between its current share price and net asset value per share.
In a nutshell, minorities would generally not be in favour of any listed firm keeping all the cash from major divestment exercises for fear of related-party acquisitions that may result in cash being channelled to the major shareholder in exchange for low-yielding assets.
That is, unless the listed firm has a good track record in making use of its cash reserves to make acquisitions or expand its businesses to achieve even better returns.
Thus far, Perak Corp has not elaborated on its plan to further grow its businesses with proceeds from the Integrax stake sale.
At present, the group derives its earnings from port operations and property development.
Port operations contributed RM38.42 million to the group’s total pre-tax profit of RM70.86 million in FY2014, while property development contributed RM34.15 million, a sharp increase from RM9.49 million the year before.
Analysts say there is limited growth for the group’s port operations. The throughput at its 50%-plus-one-share owned Lumut Maritime Terminal has remained flat at about three million metric tonnes over the past three years due to the small port’s dependence on hinterland cargo.
Its 20-year concession agreement with the state for exclusive port operations within a 30km radius will also end in July.
Given the limited growth potential of its port assets, Perak Corp crucially needs funds to fast-track its 1,500-acre township development in Bandar Meru Raya, Perak.
The proceeds from the proposed Integrax stake sale, it seems, would come in handy, but minorities chafing at Perak Corp’s relatively low shareholders’ returns over the past few years would also be eager for a windfall.
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This article first appeared in The Edge Malaysia Weekly, on March 9 - 15, 2015.