Denko deal raises ques­tions

It will di­lute mi­nor­ity share­hold­ers’ share of the com­pany to only 5%

The Star Malaysia - StarBiz - - Companies & Strategies - By INTAN FARHANA ZAINUL in­tan­zainul@thes­tar.com.my

THE an­nounce­ment by man­u­fac­turer of plas­tic in­jec­tion moulds Denko In­dus­trial Corp Bhd this week does raise some ques­tions.

Denko said this week that it had en­tered into an agree­ment to buy a larger plas­tic mould­ing com­pany from the com­pany’s ma­jor owner and chair­man, Datuk Seri Foo Chee Juan.

But here’s the is­sue: Denko plans to pay for that ac­qui­si­tion with 1.03 bil­lion new shares.

That is 10 times the num­ber of its ex­ist­ing shares, which means that once done, the deal will re­sult in all mi­nori­ties be­ing squeezed out into hold­ing a mere 5% of the com­pany.

Such trans­ac­tions are not un­heard of. The deal sounds like a clas­sic re­verse takeover but the fact that it is the ma­jor owner in­ject­ing his own as­set into Denko is pos­si­bly why it is not one.

How­ever, two key points are to be noted. One is that the deal will re­sult in Foo hav­ing to make a manda­tory gen­eral of­fer (MGO) as his stake will rise sig­nif­i­cantly to around 95% in Denko, and se­condly, the deal is a re­lated party trans­ac­tion or RPT.

Due to it be­ing a RPT, this means that Foo who cur­rently owns 52.2% of Denko, will not be able to vote on the deal.

In other words, the choice of whether Denko goes ahead with buy­ing Foo’s as­sets lies en­tirely in the hands of the mi­nor­ity share­hold­ers of Denko who now col­lec­tively own 48% of Denko.

How­ever it is un­clear how many per­cent of these mi­nori­ties are aligned to Foo.

It should be noted that Denko’s board had en­tered into the heads of agree­ment with Foo, in­di­cat­ing that other board mem­bers are in sup­port of this deal.

Un­der the deal, Denko is look­ing to buy Foo’s In­te­grated Man­u­fac­tur­ing So­lu­tions Sdn Bhd (IMS), which is in­volved in the man­u­fac­tur­ing and sales of pre­ci­sion plas­tic in­jec­tion moulded parts.

This is sim­i­lar to Denko’s cur­rent busi­ness. IMS is also in the busi­ness of man­u­fac­tur­ing and trad­ing of air fil­ters and ster­ilis­ers, assem­bly of elec­tri­cal and elec­tronic com­po­nents and prod­ucts, as well as de­sign and fab­ri­ca­tion of tools and moulds, serv­ing the elec­tri­cal and elec­tronic in­dus­try.

In a fil­ing on Mon­day, Denko said the pro­posed ac­qui­si­tion would cre­ate en­hanced scale and syn­er­gies for the en­larged Denko group through in­creased pro­duc­tion ca­pac­ity as well as economies of scale.

“The en­larged Denko group is able to in­crease the range of value-added ser­vices for its ex­ist­ing and fu­ture cus­tomers with bet­ter cus­tomi­sa­tion of its plas­tic moulds to meet the re­quire­ments of the elec­tri­cal and elec­tronic in­dus­try,” Denko said.

Earn­ings wise, IMS is a prof­itable compa- ny with profit after tax of RM79.2mil for fi­nan­cial ended March 31, 2017, on the back of RM1.8bil rev­enue.

How­ever this in­di­cates a low profit mar­gin but this could be rep­re­sen­ta­tive of the busi­ness the com­pany is in, points out a dealer.

The pro­posed deal val­ues the com­pany at 15 times FY17 earn­ings.

Mi­nor­ity share­hold­ers will have to con­sider if this is a fair value for the as­set their com­pany is buy­ing.

As for Denko’s earn­ings, its prof­itabil­ity has been er­ratic.

Denko re­ported a loss of RM11.3mil for the fi­nan­cial ended March 31, 2017 (FY17), com­pared with a net profit of RM2.9mil a year ear­lier.

It was also in the red in 2014. None­the­less, it’s rev­enue has been grow­ing steadily.

In FY17 it grew by 10% to RM101.6mil from RM92.7mil pre­vi­ously.

Denko had net debts of RM23.2mil as at June 30, 2017.

Back to Denko’s pro­posed ac­qui­si­tion, it is likely that Foo in­tends to main­tain Denko’s list­ing sta­tus fol­low­ing the ac­qui­si­tion, to al­low the the com­pany ac­cess to the cap­i­tal mar­ket for fu­ture fund-rais­ing needs.

Go­ing by this, and con­sid­er­ing that Foo will end up with around 95% of the eq­uity of Denko post the ac­qui­si­tion, the com­pany will have to con­duct a mas­sive place­ment ex­er­cise to meet it’s pub­lic spread re­quire­ment of 25%.

This is turn will di­lute fur­ther the stakes of ex­ist­ing mi­nor­ity share­hold­ers al­though it would bring in fresh cap­i­tal into the com­pany.

Foo’s emer­gence in Denko

Foo first emerged in Denko when he launched an un­ex­pected takeover of­fer for Denko in Fe­bru­ary at a price of 55 sen a share.

The of­fer was at a 21% pre­mium over Denko’s mar­ket price of 45 sen. His of­fer was con­di­tional upon him reach­ing at least 50% of the com­pany’s own­er­ship and he had in­tended to main­tain the list­ing sta­tus of Denko. Foo ended up with just over 50% and his move stirred ex­cite­ment in the oth­er­wise dull stock. Prior to the of­fer Foo did not own any shares in Denko.

Fol­low­ing his buy in, he be­came chair­man of Denko.

Foo’s move is seen as one aimed at strength­en­ing his busi­ness foot­print in the Malaysian plas­tic in­jec­tion mould­ing sec­tor. But he will only get this deal done with Denko’s mi­nor­ity share­hold­ers’ sup­port.

He could face re­sis­tance from these mi­nor­ity share­hold­ers, con­sid­er­ing the di­lu­tion of their eq­uity fol­low­ing from the deal.

But it is worth not­ing that the share­hold­ers of Denko, who did not sell their shares back in Fe­bru­ary are sit­ting on a hand­some re­turn.

Shares of Denko have dou­bled since Foo emerged in the com­pany.

It was last traded at RM1.47 a share, which is a sig­nif­i­cant pre­mium to Denko’s net as­set per share of 41.4 sen.

For a loss mak­ing com­pany, Denko has re­ceived a lot of head­lines this year.

But the ques­tion is could this deal mark the turnaround of this com­pany which was listed on the Main Mar­ket back in 1991?

Cor­po­rate ex­er­cise: A pro­duc­tion line at Denko’s fac­tory. Denko said this week that it had en­tered into an agree­ment to buy a larger plas­tic mould­ing com­pany from the com­pany’s ma­jor owner and chair­man, Datuk Seri Foo Chee Juan.

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