MARKET DEVELOPMENT
Taking A Leaf From Kulim-NBPOL Case
Taking A Leaf From Kulim-NBPOL Case
19/08/2013 (The Star) - The repartee between Kulim (Malaysia) Bhd and the independent directors of New Britain Palm Oil Ltd (NBPOL) is a great example of the depth of debates that should take place in buyouts that involve minority shareholders. Sadly, we rarely see such detailed arguments put forward in buyout situations involving our own companies here.
Kulim-NBPO discussions should give us a lesson of what independent directors and top management of companies as well as those wanting to buy out listed companies, should be doing – each fighting for the best deal in the most clearly argued and well-researched manner, thus helping the minority to make a more informed decision.
You can read those arguments online here: http://www.nbpol.com.pg/wp-content/uploads/downloads/2013/08/NBPOL-Target-Company-Statement-6-Aug-2013.pdf (for the independent directors report) and http://www.bursamalaysia.com/market/listed-companies/company-announcements/1378785 (for Kulim’s response to that).
Kulim had made a partial offer to the shareholders of London and Papua New Guinea-listed NBPOL in June at a price of £5.50 (RM28) per share. Kulim is already the major shareholder of NBPOL but wants to raise its 48.97% in NBPOL to 68.97%.
A partial offer simply means that as opposed to wanting to buy all the outstanding shares in the target company, Kulim will only want a portion of that.
The key arguments by both sides have centered on the true value NBPOL’s shares and rightfully so as that goes to the crux of the matter. As they say, there’s a price for just about everything and capital markets are formed precisely to help us all achieve this many-splendored thing called “price discovery”.
Clearly though, valuation is a subjective matter. And precisely because of that, we need to see much more debate and analysis when Malaysian listed companies are faced with buyout proposals.
Notably in the NBPOL case, the independent advisor, BDO, used a number of valuation matrix to assess the value of NBPOL’s shares. It used discounted cash flow (DCF) as its primary valuation method and explained in three clear bullet points why it thought that was the best way to value NBPOL. Aside from that, it also crunched NBPOL’s enterprice value (EV) and earnings before interest, depreciation and amortisation (EBITDA) number to come up with cross-checking valuation methods of EV/EBITDA, EV to hectare.
That wasn’t the end of the matter though. In many valuation methods, certain assumptions are made and these assumptions in turn have a big influence on the final valuation numbers.
Hence in its respond to the independent valuation by BDO, Kulim rightfully challenged some of those assumptions. For example, Kulim reckoned that BDO’s assumption that the long-term price for crude palm oil (CPO) of US$1,100 per tonne was too aggressive, supporting that with some good arguments and facts. Kulim also said BDO had used a rather low weighted average cost of capital (WACC, what is the discount rate used in the calculation of DCF) that does not take into account the realities of doing business in Papua New Guinea.
Minority shareholders of NBPOL have all these to help them formulate their decision on whether to accept the offer by Kulim. Sadly, the same cannot be said of many instances of buyouts of Malaysian listed companies.
So, the next time a major shareholder tries to buy back his company on the cheap, here’s the message to independent advisors and directors of the target company – don’t fall short of your role. Draw strength and lessons from the NBPOL case. Minority shareholders of Malaysian-listed companies deserve no less.
Senior business editor Risen Jayaseelan wonders if the reason why Kulim isn’t considering making a generous full general offer for NBPOL’s shares is because of the difficulty in securing funding to do so, considering Kulim’s current debt levels as well as the current low prices of CPO
Kulim-NBPO discussions should give us a lesson of what independent directors and top management of companies as well as those wanting to buy out listed companies, should be doing – each fighting for the best deal in the most clearly argued and well-researched manner, thus helping the minority to make a more informed decision.
You can read those arguments online here: http://www.nbpol.com.pg/wp-content/uploads/downloads/2013/08/NBPOL-Target-Company-Statement-6-Aug-2013.pdf (for the independent directors report) and http://www.bursamalaysia.com/market/listed-companies/company-announcements/1378785 (for Kulim’s response to that).
Kulim had made a partial offer to the shareholders of London and Papua New Guinea-listed NBPOL in June at a price of £5.50 (RM28) per share. Kulim is already the major shareholder of NBPOL but wants to raise its 48.97% in NBPOL to 68.97%.
A partial offer simply means that as opposed to wanting to buy all the outstanding shares in the target company, Kulim will only want a portion of that.
The key arguments by both sides have centered on the true value NBPOL’s shares and rightfully so as that goes to the crux of the matter. As they say, there’s a price for just about everything and capital markets are formed precisely to help us all achieve this many-splendored thing called “price discovery”.
Clearly though, valuation is a subjective matter. And precisely because of that, we need to see much more debate and analysis when Malaysian listed companies are faced with buyout proposals.
Notably in the NBPOL case, the independent advisor, BDO, used a number of valuation matrix to assess the value of NBPOL’s shares. It used discounted cash flow (DCF) as its primary valuation method and explained in three clear bullet points why it thought that was the best way to value NBPOL. Aside from that, it also crunched NBPOL’s enterprice value (EV) and earnings before interest, depreciation and amortisation (EBITDA) number to come up with cross-checking valuation methods of EV/EBITDA, EV to hectare.
That wasn’t the end of the matter though. In many valuation methods, certain assumptions are made and these assumptions in turn have a big influence on the final valuation numbers.
Hence in its respond to the independent valuation by BDO, Kulim rightfully challenged some of those assumptions. For example, Kulim reckoned that BDO’s assumption that the long-term price for crude palm oil (CPO) of US$1,100 per tonne was too aggressive, supporting that with some good arguments and facts. Kulim also said BDO had used a rather low weighted average cost of capital (WACC, what is the discount rate used in the calculation of DCF) that does not take into account the realities of doing business in Papua New Guinea.
Minority shareholders of NBPOL have all these to help them formulate their decision on whether to accept the offer by Kulim. Sadly, the same cannot be said of many instances of buyouts of Malaysian listed companies.
So, the next time a major shareholder tries to buy back his company on the cheap, here’s the message to independent advisors and directors of the target company – don’t fall short of your role. Draw strength and lessons from the NBPOL case. Minority shareholders of Malaysian-listed companies deserve no less.
Senior business editor Risen Jayaseelan wonders if the reason why Kulim isn’t considering making a generous full general offer for NBPOL’s shares is because of the difficulty in securing funding to do so, considering Kulim’s current debt levels as well as the current low prices of CPO