Frankly Speaking: Nov 15-21, 2010

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Forced merger means nothingIn the midst of the consolidation of the local car industry, one aspect that should be given priority is the interests of the various stakeholders.
Based on developments so far, it is evident that Perusahaan Otomobil Kedua Sdn Bhd (Perodua) is not that keen on a merger. What is palatable to the manufacturer of small cars is a working arrangement to benefit the automotive ecosystem without involving any swapping of shares.
But for Proton Holdings, a working arrangement without shareholding changes is not feasible because neither party would be committed to ensure the arrangement — which is to reduce the cost of producing a car — is fulfilled.
In other words, the national car manufacturer advocates a shareholding change so that the working relationship can be cemented. More importantly, one dominant party calls the shots and one person will be held accountable.
While the overriding objective of a consolidation is to ensure Malaysia has a stronger automotive industry, it is paramount that the interests of the various shareholders are not compromised.
Perodua has Daihatsu of Japan as its partner and a stakeholder in its manufacturing arm. The Japanese partner is happy with its investment in Perodua. So are the Malaysian parties — UMW Holdings Bhd and MBM Resources Bhd.
There is little point in forcing a consolidation if the shareholders are unhappy with the plan because it will be a protracted process and nobody will win at the end of the day. Hefty premium that needs explainingLembaga Tabung Amanah Warisan Negeri Terengganu (LTAW) created quite a stir last week when it proposed to acquire a 21.26% stake in Eastern Pacific Industrial Corp Bhd (EPIC) from Ahmad Zaki Resources Bhd (AZRB) for RM111.5 million or about RM3.10 a share.
The price the state is proposing to pay for the shares is almost at a 48% premium to EPIC’s closing price of RM2.09 last Monday.
It’s a no-brainer — for AZRB the deal is certainly palatable. The construction outfit makes an estimated RM11.5 million. AZRB had originally acquired the bulk of the shares — some 20.41% in October 2007 at RM2.40 a share, or RM82.6 million — from pilgrim fund Lembaga Tabung Haji.
The returns for AZRB would have been higher had it not incurred high borrowing costs for the acquisition. Thus, AZRB exiting EPIC is a given.
But why is the state buying at such a high premium to the market price? Where are the funds coming from? Is it from the oil royalty that the state receives from Petronas?
EPIC has traded above RM3.10 only twice before. Once in end-July 2007, possibly at the tail end of the oil and gas bull run, and between  September and October 1994.
Whether it will trade at such levels again is anybody’s guess, meaning that the state has to really work on its investment in EPIC to recover its monies.
One reason the state paid such a high premium could be that EPIC is an illiquid counter and such a large block is hard to come by.
But the 21.26% block in EPIC that LTAW proposes to acquire is merely an addition to the state’s already substantial stake in the company. Terengganu Inc already owns 40.13% of EPIC and is firmly in control of the company.
So why would the state want to accumulate another big block in EPIC at a premium? Unless it has plans for EPIC and it wants to consolidate its shareholding in the company. This is what shrewd businessmen would do. They would consolidate their shareholding in a listed company to more than 50% before adding value to the company.
To its credit, EPIC has shown some improvement in its earnings. For the six months ended June, it posted a net profit of RM24.55 million on RM108.98 million in revenue. The company’s net cash flow from operating activities for the six-month period amounted to RM22.45 million. Its net assets per share as at end-June was RM2.04. At its close last Friday of RM2.33, the company had an indicated gross dividend yield of 2.15%.
But considering that LTAW is looking at forking out a high premium for the company, perhaps it should justify the purchase.

Time of reckoning for HLBBGiven that the lawsuit involving the disposal of the assets and liabilities of EON Capital Bhd is still ongoing, it goes without saying that the fate of the proposed takeover by Hong Leong Bank Bhd (HLBB) is uncertain.
What is certain, however, is that HLBB will have to state its stand on its proposed RM5.06 billion acquisition soon.
Come Nov 30, the deadline that HLBB has given EONCap to fulfil all the conditions precedent to the sale will expire.
But based on the fact that the suit involving EONCap will go on until March 1, 2011, and another starts hearing only next month, HLBB will have to decide whether to extend the deadline.
All eyes will be on HLBB’s announcement on the matter in the next two weeks. Will the Tan Sri Quek Leng Chan-controlled banking group go the distance in its bid for EONCap’s assets and liabilities?
It has been a long journey for HLBB thus far. Come December, it would have been a year since the deal was put on the table. A few more months will not make a difference. No doubt time wasted is opportunity lost, especially for HLBB.
Primus Pacific Partners (Malaysian unit) has filed two suits in relation to the proposed disposal of EONCap’s assets and liabilities, which are likely to drag on.
The question is, can HLBB wait that long? We will know in a few weeks.

This article appeared in Corporate page of The Edge Malaysia, Issue 832, Nov 15-21, 2010