A series of coincidences at Masterskill?

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SIX months ago, Masterskill Education Group Bhd executive chairman Siva Kumar Jeyapalan looked as though he was on his way out of the company. He had  secured a lucrative RM1.10 apiece buyout offer from Hong Kong-based Gary How, who was made Masterskill’s CEO. But it appears that Siva Kumar will be sticking around at Masterskill a while longer, if recent events are any indication.

Not only did Siva Kumar waive the chance to exit the loss-making firm at three times what Masterskill shares fetch in the open market, filings show that he raised his stake from 28.08% to 31.99% after buying 8.56 million shares at 35.5 sen apiece on Sept 19. That was two days after the “mutual termination” of the put and call option between Siva Kumar and How.

Given that How’s call option for Siva Kumar’s stake would have expired by Sept 18 anyway, the “mutual termination” essentially meant How no longer has to buy Siva Kumar’s 28.08% stake at RM1.10 apiece between Dec 18, 2014, and Jan 18, 2015, should Siva Kumar exercise his put option.

How only has 1.68% of Masterskill after paying RM1.10 apiece or RM7.59 million to buy 6.9 million shares from Siva Kumar on April 14 and Aug 18 this year, both during the so-called “closed period” in which shareholders have to announce to Bursa Malaysia the intention to trade. That’s only 5.8% of Siva Kumar’s stake in Masterskill, and RM7.59 million could have bought 5% of Masterskill on the open market.

The small purchases by How and subsequent scrapping of the put option is something that caused  observers to see the RM1.10 apiece option price as “a prize that’s repeatedly dangled to a child, just out of reach, but unknown to the child”. Yet, investors should know that the put/call option is not a forward contract and the parties entering into a put and call option have the choice of not exercising their option.

Siva Kumar did not say why he released How from honouring the seemingly lucrative put option for his 28.08% stake at RM1.10 apiece or RM126.61 million, which could buy 84.6% of Masterskill at the stock’s 36.5 sen close on Sept 17 when the agreement was terminated. Siva Kumar has yet to respond to requests for comment.

Nonetheless, back-of-the-envelope calculations show the 8.56 million shares purchased on Sept 19 means Siva Kumar’s holdings in Masterskill will cross the 33% threshold for a mandatory general offer (MGO) if the company buys back 8.6% of its current share base and cancels those treasury shares. That’s only 11.13 million shares away after Masterskill spent RM8.3 million, or an average of 34.47 sen apiece, buying back 5.87% of its share base between Sept 10 and 23 this year.

Investors hoping for a buyout offer at the RM1.10 apiece that Siva Kumar’s and How’s put and call option was priced at on March 19 this year shouldn’t hold their breath, though.

Not only did Siva Kumar not pay anywhere near RM1.10 apiece, there is the option to ask the Securities Commission (SC) for a waiver from making a buyout offer should his stake in Masterskill cross the 33% MGO threshold as a result of the cancellation of treasury shares.

PE-fund and IPO promoter exits

Incidentally, Siva Kumar’s stake purchase and the share buybacks happened just as the remaining promoters of Masterskill’s IPO in May 2010 — Cayman Island-incorporated Masterskill Holding Ltd (MHL) that private equity firm Crescent Group is deemed interested in — sold most if not all of its remaining 11.34% in Masterskill for an estimated RM16.04 million.

Including the 10.18% stake sold between March 24 and April 3, the tally for the 21.52% stake it had in early March 2014 is estimated at RM35.3 million or 40 sen on average. This could not be immediately confirmed. Crescent Point Group’s founding partner Richard Scanlon and chief financial officer Lawrence Lim Yong Chye, who are still Masterskill’s alternate director and  director respectively at the time of writing, had yet to return phone calls seeking comment.

According to filings, some 37.9 million shares were sold by MHL for 34.3 sen apiece or RM13 million in total on Sept 18, leaving only a 2.09% stake or 8.56 million shares, which incidentally was the same number of shares Siva Kumar bought at 35.5 sen apiece or RM3.04 million in total on Sept 19.

Filings show MHL started selling shares four days after Siva Kumar and How entered into the put and call option on March 19. MHL sold 41.74 million shares or 10.18% of Masterskill between March 24 and April 3 this year, paring its stake to 11.34% from the 21.52% it had kept since March 2011.

The bulk of these shares were sold on March 27 and 28 at undisclosed prices when a similar number of shares changed hands off-market (16.5 million shares on March 27) at 42.5 sen and 40 sen (12 million shares on March 28) apiece or 7% stake for RM11.81 million in total.

Masterskill had incurred losses for 11 straight quarters up to June 30 this year. Photo by Kenny Yap

MHL could have potentially received RM6.9 million or 57.79 sen apiece on average for the 11.94 million shares it sold, going by the volume weighted average prices (VWAP) of between 45.7 sen and 61.13 sen for the four remaining days that filings showed MHL also sold shares.

Masterskill’s share price doubled over three weeks, going from 29.5 sen on March 3 this year to 61 sen on March 24 when MHL began selling shares. By April 3, Masterskill closed at 44.5 sen and the stock continued to slide to 36.5 sen when the put/call option was terminated on Sept 17. It closed at 37 sen last Thursday (Sept 25).

Masterskill’s share buyback activity was at its most aggressive on Sept 18, spending RM8.02 million to buy 23.3 million shares the day MHL sold 37.92 million shares. Masterskill made its first share buyback since listing on Sept 10 this year and between then and Sept 23 had spent RM8.29 million (or an average cost of 34.47 sen per share) buying 24.06 million shares or 5.87% of the company’s share base. Its average cost of 34.47 sen apiece is below Masterskill’s unaudited net asset per share of 59 sen on June 30, 2014 and open market prices at the time of writing.

Was Masterskill’s sudden aggressiveness in buying back its own shares spurred by knowledge of MHL’s selling or intention to sell?

Masterskill — that had been loss-making for 11 straight quarters — was in a net debt position as at June 30 this year, with RM14.3 million cash and RM36.7 million borrowings.

A stroke of luck in Hong Kong?

Fortunately, perhaps, Masterskill made some RM13.3 million trading profit in less than five months from selling its entire 118 million shares in Hong Kong (GEM Market)-listed Gayety Holdings Ltd for RM33.24 million on Aug 19 this year.

Masterskill had on March 28 — four days after Gary How and his wife Yap Yoke Chuan were appointed directors at Masterskill without having any shares in the company — agreed to buy the 3.69% stake at 40 HK cents apiece or RM19.98 million from two individuals, Ye XiaoQuan and Wu MinYing.

Chinese restaurant group Gayety was trading at some 80 times historical earnings using Masterskill’s entry cost of 40 HK cents. Gayety, which are 52% controlled by its chairman Wong KwanMo and CEO Lau Lan Ying, saw its application to transfer to the Main Board of the Hong Kong Stock Exchange lapse in November 2013 and had to date yet to reapply for transfer, company filings show. Closing at 87 HK cents last Thursday (Sept 25), Gayety was trading at 174 times earnings and 55 times book.

With the exit of MHL and Crescent Point, Siva Kumar’s position as Masterskill’s single largest shareholder is further enhanced. Masterskill’s second largest shareholder is now Datin Seri Carline Johnson D’Cruz with a 6.25% stake as at April 30 this year. She is the wife of another Masterskill IPO promoter, Datuk Seri Edmund Santhara who sold 72 million Masterskill shares or a 17.56% stake at 40 sen apiece to Siva Kumar on May 2, 2013. That deal raised Siva Kumar’s stake in Masterskill from 12.2% to 29.76%.

It is not known why MHL and Crescent Point chose to exit Masterskill. Founded by former Morgan Stanley bankers in Asia — Sami Sindi, Richard Scanlon and David Hand —  private equity firm Crescent Point was AirAsia Bhd’s second largest shareholder before the budget carrier went public in 2004, according to Crescent’s website. MHL offered for sale some of its Masterskill shares at the latter’s IPO, cutting its holdings from 45.87% to 38.49% following the IPO. Santhara also sold some shares at RM3.50 apiece at IPO, Masterskill’s IPO prospectus show.

Whatever the case, given his holdings, Siva Kumar has the most to benefit if Masterskill can be turned around but it is not known if he is still looking for another buyer for his stake. His entry cost is estimated at around 60 sen apiece, above prevailing market prices given that a 12% block was accumulated between March 2011 and March 2012 when Masterskill shares were hovering around the RM1-mark. His cost looks poised to fall below Masterskill’s book value per share if the company cancels its treasury shares. All these, however, does not answer the question of whether Masterskill is on its way to a turnaround, six months after some investors chased  the stock higher on the hope of better days ahead.

This article first appeared in The Edge Malaysia Weekly, on September 29 - October 5, 2014.