WITH its paper-thin trading volume and low investor interest, it is only a matter of time before YTL e-Solutions Bhd is taken private. But YTL Corp Bhd is not paying a premium to take full control of its 74.12%-owned subsidiary, offering only 55 sen a share for it.

Not surprisingly, minority shareholders are less than pleased with the offer. After all, YTL e-Solutions is cash rich and has a virtually guaranteed income stream. The recently launched 4G LTE network by YES is also expected to benefit the company.

YTL e-Solutions holds the licence for the 2,300MHz spectrum that is leased to YTL Communications Sdn Bhd, which is in turn wholly owned by YTL Power International Bhd.

Nonetheless, YTL Corp executive director Datuk Yeoh Seok Hong asserts that the offer is equitable.

“I think it is a fair offer. We are offering market price for the shares and we will be giving shareholders shares in YTL Corp. They (minorities) will continue to be part of the YTL family while enjoying better liquidity,” he tells The Edge.

The privatisation offer will not be settled with cash but with YTL Corp shares. For every YTL e-Solutions share, shareholders will receive 0.333 YTL Corp share based on an issue price of RM1.65.

But is paying market value a “fair offer” if YTL e-Solutions is fundamentally undervalued due to poor trading liquidity?

On a price-earnings-ratio basis, the offer values YTL e-Solutions at 21.3 times earnings. At face value, this is decent, given that the company is not an earnings growth stock.

However, YTL e-Solutions is not favoured for its growth but for its steady earnings. It generates the bulk of its income from leasing the spectrum to its sister company — about RM81 million a year. This is seen as a low-risk business since the operational risks are borne by YTL Power, which at the same time is a good paymaster for YTL e-Solutions.

Coupled with steady dividend payments, YTL e-Solutions is a relatively attractive value proposition for shareholders.

The company paid out a dividend of four sen per share in the past two years, giving it a yield of 7.27%. This is lucrative in the current yield environment but also involves a high dividend payout ratio of 155%.

YTL e-Solutions had previously paid a dividend of two sen per share each year.

The company is more than capable of paying higher dividends, given that it is sitting on a cash pile of RM173.5 million. This means some 91.3% of the company’s net assets is in cash or 12.9 sen per share. Stripping out the cash, YTL e-Solutions would be valued at 16.32 times earnings or 42.1 sen per share.

With the launch of YES’ 4G LTE service, is there upside potential for YTL e-Solutions’ earnings?

“Not directly,” says Yeoh, who remains tight-lipped on the take-up of the service, saying an announcement will be made at the appropriate time.

“YTL e-Solutions leases the spectrum to YTL Communications on a fixed basis. YTL Communications will enjoy all the benefits if the LTE service does well, not YTL e-Solutions,” he adds.

He qualifies, however, that YTL e-Solutions also provides other services to YTL Communications and will benefit if the latter grows and performs well.

Coming back to the offer, it appears to be a good deal for the acquirer, YTL Corp. Buying the outstanding shares in YTL e-Solutions will allow it to gain full access to the company’s cash.

The benefit for YTL e-Solutions’ minorities is less obvious. Right now, they enjoy a dividend yield of 7.27% but after swapping for YTL Corp shares, the dividend yield will fall to 5.69%.

However, Yeoh argues that it is a win-win situation.

“The privatisation of YTL Cement Bhd shows that the minorities benefited, as will the privatisation of YTL e-Solutions,” he insists.

Recall that when the offer was made in late 2011, YTL Cement’s minority shareholders had also voiced their displeasure over the offer price. They were only offered a nominal premium and YTL Corp shares instead of cash. While it is not clear what the prospects are for YTL e-Solutions, in hindsight, it is clear that YTL Corp’s shareholders benefited from the privatisation of YTL Cement.

The company was taken private just as the construction boom began. Its revenue has since increased 24.2% while profit before tax has risen 25.6%.

In contrast, the total return for investing in YTL Corp over the same period has only been 19.5%, assuming dividends were reinvested in the stock. This is not too shabby but substantially lower than the 25.6% earnings growth YTL Cement has enjoyed. This also does not take into account the 2.92% dividend yield that YTL Cement was paying when it was privatised.

Assuming the dividend payments remained unchanged, conservative back-of-the-envelope calculations show that YTL Cement’s return to shareholders would have been 36% if it had not been privatised. This assumes YTL Cement’s PER remained unchanged at 9.2 times. In contrast, fellow cement-maker Lafarge Malaysia Bhd is currently trading at a PER of over 30 times.

Still, if history is anything to go by, YTL Corp is likely to get its own way. This time around, it only needs to acquire 25.88% of YTL e-Solutions’ outstanding shares compared with YTL Cement’s 47.22% back then.

YTL e-Solutions’ market capitalisation is also smaller at RM726 million compared with YTL Cement’s RM2.14 billion at the time.

Interestingly, it will take a lot less to block the privatisation of YTL e-Solutions. At least 10% of the minorities need to reject the offer to block compulsory acquisition of the outstanding shares. Hence, a mere 2.6% block of shares would be enough to thwart the takeover.

But looking at YTL e-Solutions’ fragmented shareholder list, this is unlikely to happen. It appears that once again, YTL Corp’s shareholders will get the better bargain in this privatisation exercise.

YTL e-Solutions closed down 0.93% at 53.5 sen last Friday with 292,100 shares traded. 

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