THE Chia family, which owns a majority stake in QL Resources Bhd, has questioned the motive and “real spirit” of the group’s associate company Lay Hong Bhd in proposing a private placement of up to 30% of its enlarged share capital.
In a statement released to the media late last Friday, QL Resources (fundamental: 1.10; valuation: 1.50) executive director Chia Mak Hooi says Lay Hong’s (fundamental: 0.45; valuation: 0.60) move to place out an unusually large number of shares raises a lot of questions.
“We question the actual necessity of giving up 30% of the company’s equity to external parties at a discounted price. If approved and executed, current shareholders are certainly getting a raw deal in this proposal by Lay Hong’s board of directors.
“It also calls to question the motive and the real spirit behind this exercise,” says Mak Hooi, who is representing QL Resources’ interests and was formerly a non-independent, non-executive director of Lay Hong.
Last Wednesday, Lay Hong’s board of directors proposed a private placement of up to 15.75 million shares or about 30% of the group’s enlarged share capital and the establishment of a share issuance scheme (SIS) that will allow it to issue up to 15% of the group’s shares to directors and eligible employees.
The private placement will raise gross proceeds of up to RM48.98 million based on the issue price of RM3.11 per share. Most of the proceeds will be utilised as working capital, says Lay Hong in its announcement to Bursa Malaysia.
The company clarifies that the proposed private placement is to increase the group’s public shareholding spread, which stood at 15.42% of its share capital as at Dec 31, 2014, to comply with Bursa’s requirement of 25%.
QL Resources is the second largest shareholder of Lay Hong with a 39% stake. Lay Hong group managing director Yap Chai Hoong and his family own 42.87% of the medium-sized poultry farmer, making them the largest shareholder.
The feud between the Yap and Chia families started when Mak Hooi was booted out of Lay Hong’s board last year. Subsequently, QL Resources launched a conditional takeover bid for Lay Hong, offering RM3.50 each for all the shares it did not own in the smaller rival.
The bid failed as QL Resources managed to secure only 6% of Lay Hong’s shares before the offer deadline lapsed on Dec 10, 2014. The group needed to hold more than 50% of Lay Hong to make the offer unconditional.
It is believed that the Yap family holds sway among the minority shareholders. In fact, more than 60% of eligible shareholders in Lay Hong voted against Mak Hooi’s reappointment to the board at its annual general meeting last year.
The latest proposal does not bode well for the Chias as it will dilute the family’s holding in Lay Hong to 24.97%. Mak Hooi reasons that there are other ways for Lay Hong to raise funds without leading to shareholding dilution.
“Based on our calculation, if Lay Hong takes the private placement route to address the public spread requirement, 15% of its existing share capital is more than sufficient to meet the public spread requirement (of 25%).
“If fundraising is another rationale for undertaking such a large private placement, the balance 15% of the proposed 30% can be done via a rights issue, so all shareholders have the option to participate in the exercise,” he says in the statement.
According to Lay Hong’s announcement, the Chia family’s shareholding will be diluted to 24.97% from the 39% now while the Yap family’s stake will be reduced to 27.66% from 42.87% upon the completion of the proposal. Public shareholding will increase to 45.43%.
Industry observers see the two proposals as a way for the Yap family to tighten its grip on Lay Hong. This follows moves by the Chia family to increase its stake in the group via purchases on the open market. As at Jan 29, the Chia family had increased its equity interest in Lay Hong to 19.76 million shares or 39% from 33.98% in October last year.
The latest development at Lay Hong shows that the feud between the two families is far from over. The private placement and SIS are seen by observers as a way for the Yap family to dilute the Chia family’s shareholding.
“If Lay Hong wants to raise funds for working capital, why can’t it issue rights shares? Wouldn’t that give shareholders the option of participating or maintaining their holding?” asks an observer.
The proposed establishment of SIS also calls into question Lay Hong’s real motive because the scheme will enable the company’s board to issue a maximum 15% of the group’s share capital to directors and eligible employees.
According to the group’s announcement, the proposed SIS will be administered by a committee to be duly appointed and authorised by the board. The SIS committee will decide the aggregate number of SIS options that may be offered and allocated to eligible persons.
Lay Hong explains that SIS was proposed to reward the contributions of the directors and eligible employees, to align their interests with those of the shareholders as well as reinforce their loyalty and sense of belonging to the company.
However, given the nature of the relationship between the Yap and Chia families, it is naïve to think the proposals will do that, points out an observer. The fact that the Chia family does not have a representative on Lay Hong’s board set tongues a-wagging.
To be fair, the private placement does not seem targeted at the Chia family as it will dilute the holding of all shareholders. However, the impartiality of a third-party investor may be a point of contention for the two families.
Following the announcement, Kenanga Research states in an analyst report that QL’s profit recognition from associate level is estimated to be lower at RM4.9 million from RM6.6 million, which in turn will only cause a minor 0.9% decline in its FY2015 estimated net profit of RM189.9 million.
“Nonetheless, we expect QL to hold further negotiations with Lay Hong to request a seat on the latter’s board to safeguard its interest in the associate company, which was what prompted the takeover attempt in September 2014,” states the research house.
On whether QL Resources will give up its plan to take over Lay Hong or even sell its shares, Mak Hooi says the Chia family does not rule out any possibility to protect its interests.
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This article first appeared in The Edge Malaysia Weekly, on February 9 - 15, 2015.