LOYAL minority shareholders of Tecnic Group Bhd may feel they have been dealt a losing hand when sister company SKP Resources Bhd proposed to acquire all the plastic component manufacturer’s subsidiaries rather than tabling a general offer (GO). This is because, theoretically, once Tecnic disposes of its subsidiaries, it will become a shell company and be classified as a Practice Note 17 company.

Ivan Gan Poh San, executive director of SKP and son of SKP and Tecnic’s common controlling shareholder Datuk Gan Kim Huat, however, argues the proposed method of consolidating the two companies is an “equally enticing offer for both sets of shareholders”.

Had SKP issued a GO, he says, Tecnic shareholders would have to part with their shares, which could still be worth something should Tecnic acquire new assets and operations.

In an interview with The Edge, Gan admits that the family has yet to decide what to do with Tecnic after the disposal of the subsidiaries. The listing status will remain, as stated in its announcement, but Gan says his family is now solely focused on the consolidation exercise.

“You (Tecnic shareholders) are going to have shares valued at RM4.95 each. The moment you get SKP shares, you can sell them if you want to. But if SKP is trading above 58 sen, your shares are valued much higher [because they are issued at a discount],” Gan explains.

“However, if assets are eventually injected into Tecnic, the shares will be worth something. I think it (the subsidiary disposal route) is more objective. If we do a GO, Tecnic shareholders get RM4.95 apiece, but that’s it.”

Last Thursday, both SKP and Tecnic announced that the former intends to buy out the latter’s subsidiaries for RM200 million in cash and shares.

For every Tecnic share held, a shareholder will receive RM2.35 in cash and dividend-in-specie of 4.27 newly issued SKP shares at 58 sen each.

Tecnic shares rocketed to an 18-year high of RM5.08 hours before the counter — along with SKP’s — was suspended last Monday ahead of the merger announcement on Thursday. SKP’s offer of RM4.95 a share for Tecnic’s subsidiaries is at a 14.58% premium to the counter’s 30-day volume weighted average price (VWAP) of RM4.32.

As at last Friday, Tecnic’s counter was traded 11 sen higher at RM5.19, giving it a market capitalisation of RM205.22 million.

The new SKP shares will be issued at 58 sen apiece, at a 12% discount to the 30-day VWAP of 66 sen. Analysts covering SKP have revised their target prices for the counter to between 83 sen and RM1.10, with the average at 93 sen. The implied upside from the distributed SKP shares thus ranges from 43% to 89%.

Gan reveals that the consolidation of SKP and Tecnic — in which his family owns 70.5% and 68.7% respectively — has been a long time coming. This was the reason why SKP had been accumulating cash all these years, he adds. The company had RM139.37 million in retained earnings, RM19.403 million cash in its books and no debt as at June 30, 2014.

“Fund managers have been asking us, ‘When are you going to merge the two?’ We have been studying how best to do it for a long time,” he says.

It is somewhat of a no-brainer for the Gans to merge the two companies. As Gan says, SKP and Tecnic currently have annual related party transactions worth about RM60 million, which will balloon to RM100 million next year.

SKP, too, has been criticised for its dependence on a single customer, Dyson. Had the consolidation not taken place, Gan says the high-end British household appliance manufacturer would soon make up 65% of SKP’s annual revenue in the near term compared with the average of 50% to 55% currently.“We’re reducing the concentration risk with this acquisition. Dyson’s revenue contribution will fall to 45%,” he adds. TA Securities, however, has a projection of 35%.

SKP, a full-suite electronics manufacturing services provider, will have exposure to the food and beverage rigid packaging business. Tecnic’s clients in this sector include GlaxoSmithKline, Unilever, Suntory, Nestlé and Tupperware.

Additionally, Tecnic also manufactures oil lubricant packaging for many global oil and gas giants such as Exxon Mobil Corp, Royal Dutch Shell plc and Petroliam Nasional Bhd. As local plastic component companies are going regional, Gan says SKP’s acquisition of Tecnic’s subsidiaries will allow the latter to gain economies of scale as it will be part of a bigger entity.

For SKP, Gan expects a RM300 million revenue contribution from Tecnic, after annualising the latter’s sales of RM148.69 million for its first half ended June 30, 2014 (1HFY14). Tecnic’s net profit for the period was RM10.35 million, a 30.49% increase year-on-year.

SKP, which saw an increase of 68.35% in a matter of four months from 39.5 sen, closed at 66.5 sen last Friday. Its market capitalisation was RM598.5 million.

This article first appeared in The Edge Malaysia Weekly, on October 06 - 12, 2014.

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