MARKET DEVELOPMENT
Kulim\'s Failed Bid for New Britain Palm Oil Raises Many Questions
Kulim\'s Failed Bid for New Britain Palm Oil Raises Many Questions
17/08/2013 (The Star) - A “low-ball offer” is what many have termed Kulim (M) Bhd’s partial takeover of New Britain Palm Oil Ltd (NBPO), and that isn’t far from the truth.
The offer also throws up a whole host of questions for which the answers aren’t easily apparent.
For instance, now that the deal has been snubbed by NBPO’s board, is Kulim ready – or willing – to take another stab at increasing its stake in its Papua New Guinea and London-listed associate? Does it have the financial firepower to do so?
And what of the leverage it plans to use to fund the buyout, which, combined with its limited cash reserves, could leave the company in a precarious trail of debt?
Kulim had proposed in June an exercise to raise its holdings in NBPO by 20% to 68.97% from 48.97% currently.
The offer involves an acquisition of some 30 million shares in Papua New Guinea and Solomon Islands-based NBPO, in which Kulim has been a part-owner since 1997 when it bought a 90% stake from the existing shareholders, namely the Papua New Guinea government and Harrisons & Crosfield, who then had 60% and 40% control of NBPO, respectively.
Kulim later diluted its interest following NBPO’s listing on the London Stock Exchange (LSE) in 2007, and more recently when new shares in NBPO were issued last year, rendering it an associate of Kulim from a subsidiary previously.
The partial offer for NBPO is subject to the condition that Kulim gets no less than 50% of the total shares in NBPO as a result of the takeover.
Hit Hard
But what does Kulim hope to achieve with an additional 20% in NBPO? Is it simply a case of consolidating NBPO in its books?
That, indeed, is the official line. “NBPO has been a significant contributor to the group’s plantation earnings in the past, and hence the partial offer will enable Kulim to capture a larger share of NBPO’s financial results upon consolidation.
“Given NBPO’s scale of operations and the maturity profile of its plantation estate, the board of Kulim believes that the proposed acquisition will contribute positively to Kulim’s future earnings and enhance shareholder value in the long term,” the firm explains in a June announcement to Bursa Malaysia.
When the question was posed to the management of NBPO at a conference call with analysts last week, the recording of which was posted on its website, CEO Nick Thompson replies that Kulim had been “quite relaxed” when its stake in NBPO was pared down with the share issuance to Kula Palm Oil Ltd last May.
Thompson recalls that Kulim had made no attempt to block the placement, and he believes the Johor-based firm is floating the buyout now because the sale of its KFC business and the deconsolidation of NBPO have “hit them (Kulim) quite hard”.
Calling it an “opportunistic” move, Thompson notes that he would have done the same if he were in Kulim’s shoes.
For the shareholders of NBPO, however, accepting the offer is the “worst possible scenario”, he says.
The NBPO call uncovers several interesting dimensions to the takeover. Thompson shares that West New Britain Provincial Government, NBPO’s second largest owner behind Kulim with an 8% stake, cannot sell any of its shares via the buyout.
West New Britain, he explains, obtained its shares through a transfer from the national to the provincial government, and on that basis it can never be sold.
“The provincial government is locked into NBPO for the long-term,” Thompson says.
He does not expect the Kulim offer to gain much traction because it isn’t attractive and also due to the lack of “quality stocks” on the Port Moresby Stock Exchange.
Besides, the government has the interests of smallholders to consider. NBPO gives out shares to smallholders – from whom it sources a sizeable amount of its palm oil – in exchange for land.
NBPO is also an important “cog” in Papua New Guinea’s economy, being one of the country’s largest private sector employers.
Flat Out ‘No’
NBPO’s independent directors dealt a blow to Kulim when they told their shareholders to reject the takeover.
Kulim’s Datuk Kamaruzzaman Abu Kassim and Ahamad Mohamad, who have board seats on NBPO, abstained from the independent review process.
According to NBPO’s independent advice letter, the buyout proposed by Kulim is neither fair nor reasonable and significantly undervalues the company.
NBPO was appraised by BDO to have a fair market value of between £6.50-£7. Even at the low end of that range, Kulim’s £5.50 offer undershoots by 15.4%.
While the offer enables shareholders to cash out at a premium to NBPO’s current market price, the independent directors highlight that NBPO shares stand to lose their appeal in various ways.
To start with, if Kulim receives acceptances totalling more than the 30 million shares it is bargaining for, then a scale back clause kicks in, which allows no more than 39.2% of a single shareholder’s stock to be acquired.
Moreover, NBPO runs the risk of being delisted from LSE since the rules there mandate a free float of at least 25%. Back of the envelope calculations show that NBPO’s public spread will decline to 23% should Kulim succeed in upping its stake to 69%, taking into account the provincial government’s 8%.
This is pertinent for investors, as they will miss out on the statutory protections that a UK listing accords them.
Analysts tracking NBPO have expressed their reservations on the exercise. Liberium Capital, which has a “hold” call on the stock, says in an article carried by Agrimoney.com that Kulim’s offer is a “poor deal for shareholders”.
VSA Capital opines that Kulim may need to “raise its offer significantly to snare the full 20% it is apparently looking for”.
The broker adds that the tepid reaction in NBPO’s shares, which are trading well below Kulim’s buyout price, “clearly shows London-based investors had little faith in the deal going through at this level”.
NBPO was last traded at £4.80, while Kulim has gained 8% to RM3.60 since announcing the buyout.
What’s Next?
Still, it isn’t the end of the line for Kulim.
“All is not lost even if the takeover offer fails, as Kulim is NBPO’s single largest shareholder and hence the biggest beneficiary if the latter is worth £6.50-£7 per share,” RHB Research Institute Alvin Tai says in a recent report.
“Pricing NBPO at £7 implies that Kulim’s Johor estates are valued at RM68,700 per ha, or 64 sen per sq ft, which is cheap considering that some of its estates are prime property development land.”
He believes the acquisition, if it pans out, is earnings accretive and boosts Kulim’s fair value to RM3.80 from RM3.53.
MIDF Research has also voiced its support for the deal. Its analyst Nur Nadia Kamil estimates that Kulim’s earnings per share could more than double next year with the 20% extra in NBPO.
The planter’s landholding was also set to surge 271% to 184,000ha from 49,551ha at present.
In addition, Nur Nadia says the purchase price of RM812.3mil is fair, led by the fact that NBPO is Kulim’s crown jewel, contributing to over 70% of its total crude palm oil production last year, as well as two-thirds of its net profit.
NBPO is attractive to Kulim as most of its planted area comprises high-yielding trees (9-18 years old), Nur Nadia shares. And compared to plantation companies such as Sime Darby Bhd, Golden Agri-Resources Ltd and Kuala Lumpur Kepong Bhd, NBPO has better fresh fruit bunch and crude palm oil yield due to its research and development efforts, she adds.
Kulim says it has secured loans from a “reputable financial institution” to bankroll the takeover and will decide on the exact proportion between internal funds and borrowings later.
As at end-December, Kulim had RM222.34mil in cash and equivalents against borrowings of RM1.12bil.
Assuming the offer is fully accepted and funded by debt, Kulim expects its borrowings to bloat to RM2.89bil and gearing to 0.46 times from 0.17 times. This is higher than the 0.3 times plantation sector average.
MIDF’s Nur Nadia points out in a June note that prior to the NBPO transaction, Kulim had in 2011 bought its parent Johor Corp’s plantation estates using external borrowings, sending its debt to RM2.62bil and gearing to 0.29 times.
The subsequent disposal of its quick service restaurant operations helped bring down its debt to the current level.
Nonetheless, the research outfit thinks Kulim’s leverage, though on the high side vis-à-vis other plantation firms, remains manageable.
So what’s next for Kulim? Chances are the company could still make headway with the offer should its stake cross the 50% threshold, which would cost Kulim a mere RM41.71mil.
This is probably Kulim’s actual aim, industry observers say.
However, one analyst says Kulim’s 49% in NBPO is “good enough”, and holds the view that the partial offer does not create value for Kulim’s shareholders.
Based on his calculations, and provided Kulim achieves a full take-up of the offer, the exercise is earnings dilutive because the gains will be offset by the interest costs Kulim has to bear.
“NBPO is a fantastic asset, but it is past its prime. Its trees are no longer at their peak age and growth is single digit. Seen this way, the takeover is pricey,” the analyst remarks.
Shareholders of NBPO have until Aug 28 to mull over Kulim’s all-cash deal.
The offer also throws up a whole host of questions for which the answers aren’t easily apparent.
For instance, now that the deal has been snubbed by NBPO’s board, is Kulim ready – or willing – to take another stab at increasing its stake in its Papua New Guinea and London-listed associate? Does it have the financial firepower to do so?
And what of the leverage it plans to use to fund the buyout, which, combined with its limited cash reserves, could leave the company in a precarious trail of debt?
Kulim had proposed in June an exercise to raise its holdings in NBPO by 20% to 68.97% from 48.97% currently.
The offer involves an acquisition of some 30 million shares in Papua New Guinea and Solomon Islands-based NBPO, in which Kulim has been a part-owner since 1997 when it bought a 90% stake from the existing shareholders, namely the Papua New Guinea government and Harrisons & Crosfield, who then had 60% and 40% control of NBPO, respectively.
Kulim later diluted its interest following NBPO’s listing on the London Stock Exchange (LSE) in 2007, and more recently when new shares in NBPO were issued last year, rendering it an associate of Kulim from a subsidiary previously.
The partial offer for NBPO is subject to the condition that Kulim gets no less than 50% of the total shares in NBPO as a result of the takeover.
Hit Hard
But what does Kulim hope to achieve with an additional 20% in NBPO? Is it simply a case of consolidating NBPO in its books?
That, indeed, is the official line. “NBPO has been a significant contributor to the group’s plantation earnings in the past, and hence the partial offer will enable Kulim to capture a larger share of NBPO’s financial results upon consolidation.
“Given NBPO’s scale of operations and the maturity profile of its plantation estate, the board of Kulim believes that the proposed acquisition will contribute positively to Kulim’s future earnings and enhance shareholder value in the long term,” the firm explains in a June announcement to Bursa Malaysia.
When the question was posed to the management of NBPO at a conference call with analysts last week, the recording of which was posted on its website, CEO Nick Thompson replies that Kulim had been “quite relaxed” when its stake in NBPO was pared down with the share issuance to Kula Palm Oil Ltd last May.
Thompson recalls that Kulim had made no attempt to block the placement, and he believes the Johor-based firm is floating the buyout now because the sale of its KFC business and the deconsolidation of NBPO have “hit them (Kulim) quite hard”.
Calling it an “opportunistic” move, Thompson notes that he would have done the same if he were in Kulim’s shoes.
For the shareholders of NBPO, however, accepting the offer is the “worst possible scenario”, he says.
The NBPO call uncovers several interesting dimensions to the takeover. Thompson shares that West New Britain Provincial Government, NBPO’s second largest owner behind Kulim with an 8% stake, cannot sell any of its shares via the buyout.
West New Britain, he explains, obtained its shares through a transfer from the national to the provincial government, and on that basis it can never be sold.
“The provincial government is locked into NBPO for the long-term,” Thompson says.
He does not expect the Kulim offer to gain much traction because it isn’t attractive and also due to the lack of “quality stocks” on the Port Moresby Stock Exchange.
Besides, the government has the interests of smallholders to consider. NBPO gives out shares to smallholders – from whom it sources a sizeable amount of its palm oil – in exchange for land.
NBPO is also an important “cog” in Papua New Guinea’s economy, being one of the country’s largest private sector employers.
Flat Out ‘No’
NBPO’s independent directors dealt a blow to Kulim when they told their shareholders to reject the takeover.
Kulim’s Datuk Kamaruzzaman Abu Kassim and Ahamad Mohamad, who have board seats on NBPO, abstained from the independent review process.
According to NBPO’s independent advice letter, the buyout proposed by Kulim is neither fair nor reasonable and significantly undervalues the company.
NBPO was appraised by BDO to have a fair market value of between £6.50-£7. Even at the low end of that range, Kulim’s £5.50 offer undershoots by 15.4%.
While the offer enables shareholders to cash out at a premium to NBPO’s current market price, the independent directors highlight that NBPO shares stand to lose their appeal in various ways.
To start with, if Kulim receives acceptances totalling more than the 30 million shares it is bargaining for, then a scale back clause kicks in, which allows no more than 39.2% of a single shareholder’s stock to be acquired.
Moreover, NBPO runs the risk of being delisted from LSE since the rules there mandate a free float of at least 25%. Back of the envelope calculations show that NBPO’s public spread will decline to 23% should Kulim succeed in upping its stake to 69%, taking into account the provincial government’s 8%.
This is pertinent for investors, as they will miss out on the statutory protections that a UK listing accords them.
Analysts tracking NBPO have expressed their reservations on the exercise. Liberium Capital, which has a “hold” call on the stock, says in an article carried by Agrimoney.com that Kulim’s offer is a “poor deal for shareholders”.
VSA Capital opines that Kulim may need to “raise its offer significantly to snare the full 20% it is apparently looking for”.
The broker adds that the tepid reaction in NBPO’s shares, which are trading well below Kulim’s buyout price, “clearly shows London-based investors had little faith in the deal going through at this level”.
NBPO was last traded at £4.80, while Kulim has gained 8% to RM3.60 since announcing the buyout.
What’s Next?
Still, it isn’t the end of the line for Kulim.
“All is not lost even if the takeover offer fails, as Kulim is NBPO’s single largest shareholder and hence the biggest beneficiary if the latter is worth £6.50-£7 per share,” RHB Research Institute Alvin Tai says in a recent report.
“Pricing NBPO at £7 implies that Kulim’s Johor estates are valued at RM68,700 per ha, or 64 sen per sq ft, which is cheap considering that some of its estates are prime property development land.”
He believes the acquisition, if it pans out, is earnings accretive and boosts Kulim’s fair value to RM3.80 from RM3.53.
MIDF Research has also voiced its support for the deal. Its analyst Nur Nadia Kamil estimates that Kulim’s earnings per share could more than double next year with the 20% extra in NBPO.
The planter’s landholding was also set to surge 271% to 184,000ha from 49,551ha at present.
In addition, Nur Nadia says the purchase price of RM812.3mil is fair, led by the fact that NBPO is Kulim’s crown jewel, contributing to over 70% of its total crude palm oil production last year, as well as two-thirds of its net profit.
NBPO is attractive to Kulim as most of its planted area comprises high-yielding trees (9-18 years old), Nur Nadia shares. And compared to plantation companies such as Sime Darby Bhd, Golden Agri-Resources Ltd and Kuala Lumpur Kepong Bhd, NBPO has better fresh fruit bunch and crude palm oil yield due to its research and development efforts, she adds.
Kulim says it has secured loans from a “reputable financial institution” to bankroll the takeover and will decide on the exact proportion between internal funds and borrowings later.
As at end-December, Kulim had RM222.34mil in cash and equivalents against borrowings of RM1.12bil.
Assuming the offer is fully accepted and funded by debt, Kulim expects its borrowings to bloat to RM2.89bil and gearing to 0.46 times from 0.17 times. This is higher than the 0.3 times plantation sector average.
MIDF’s Nur Nadia points out in a June note that prior to the NBPO transaction, Kulim had in 2011 bought its parent Johor Corp’s plantation estates using external borrowings, sending its debt to RM2.62bil and gearing to 0.29 times.
The subsequent disposal of its quick service restaurant operations helped bring down its debt to the current level.
Nonetheless, the research outfit thinks Kulim’s leverage, though on the high side vis-à-vis other plantation firms, remains manageable.
So what’s next for Kulim? Chances are the company could still make headway with the offer should its stake cross the 50% threshold, which would cost Kulim a mere RM41.71mil.
This is probably Kulim’s actual aim, industry observers say.
However, one analyst says Kulim’s 49% in NBPO is “good enough”, and holds the view that the partial offer does not create value for Kulim’s shareholders.
Based on his calculations, and provided Kulim achieves a full take-up of the offer, the exercise is earnings dilutive because the gains will be offset by the interest costs Kulim has to bear.
“NBPO is a fantastic asset, but it is past its prime. Its trees are no longer at their peak age and growth is single digit. Seen this way, the takeover is pricey,” the analyst remarks.
Shareholders of NBPO have until Aug 28 to mull over Kulim’s all-cash deal.