This article first appeared in Capital, The Edge Malaysia Weekly, on December 7 - 13, 2015.

RED Sena Bhd, Malaysia’s first food and beverage special purpose acquisition company (SPAC), will be listed on the Main Market this Thursday (Dec 10), banking on the management expertise of a team led by Datuk Tan Ang Meng and Joseph Tan Eng Guan, the former CEO and chief financial officer, respectively, of Fraser & Neave Holdings Bhd.

The four previous SPACs listed locally had asked for money to buy oil and gas related assets. So far, only one, Hibiscus Petroleum Bhd, has completed a so-called qualifying acquisition (QA), which is essentially getting most shareholders to agree to buy a proposed target to be its core business.

Red Sena’s intended target is expected to be an established business in the growth phase which has operations in its target countries and can grow into a regional player in the processed F&B industry, with a focus on branded, processed and ready-to-consume F&B products, but probably not restaurants. These countries are Singapore and Asean 5 countries — Malaysia, Indonesia, Thailand, Vietnam and the Philippines — which have healthy economic growth, rising incomes and sizeable populations.

Its QA is also required to have a minimum profit after tax of RM10 million, be in the growth phase of its life cycle, operated for at least five years and be a halal business.

The size of its acquisition cheque book is RM368 million or 92% of the RM400 million gross proceeds raised from the initial public offering (IPO) held in the cash trust account. This will be distributed with interest, should a QA not be found within three years, on a pro rata basis to all shareholders except for the management team (Raintree F&B Sdn Bhd) unless they bought shares post IPO. The QA must also be at least 80% of the amount held in trust, which works out to about RM294.4 million.

As it is, the amount held in trust works out to 46 sen per share — which can also be obtained if a shareholder votes against the QA that is eventually approved — versus the IPO price of 50 sen per share, which comes with one free detachable warrant.

Should it need more cash prior to a QA being approved, Red Sena can make a rights issue where at least 90% of the gross proceeds will need to be put in the same cash trust (with the IPO’s RM368 million), according to its prospectus.

Raintree, which paid RM10 million or five sen per share for its 20% stake in Red Sena pre-IPO, will be able to unlock the full benefit of that investment once a QA is approved. Incidentally, RM10 million is also the amount slated for management remuneration, leaving RM15.65 million for working capital and RM16.35 million for listing expenses.

To counter the dilution to other shareholders, the moratorium on the sale of these shares is considerably longer than previous SPACs — the management’s lock-up period is for three years after completing its QA. Not only is there a three-year lock-up after the QA, but Red Sena must also achieve at least RM107 million accumulated profit after tax (PAT) after the QA before Raintree is allowed to sell or transfer the 20% stake.

For the IPO, only 80 million shares are offered for public subscription with 720 million being placed out.

Cornerstone investors agreed to take up 234.8 million shares with free warrants or 23.48% of the enlarged issued and paid-up share capital upon listing. They are Datuk Hew Han Seng, Affin Hwang Asset Management Bhd, Corston-Smith Asset Management Sdn Bhd, Fortress Capital Asset Management (M) Sdn Bhd, Maybank Asset Management Sdn Bhd, Pacific Straits Holdings Ltd, RHB Asset Management Sdn Bhd and UOB Asset Management (Malaysia) Bhd.

Pacific Straits is associated with Brahmal Vasudevan, founder of private equity firm Creador Capital, while Hew is the founder and managing director of Port Klang-based logistics company Tri-Mode Group.

Red Sena’s management team is led by Joseph Tan, 58, as executive director and CEO, and Datuk Tan, 60, as executive director and chief strategy officer.

Tan Sri Richard Koh Kin Lip, Cocoaland Holdings Bhd’s independent non-executive director, has stepped in as corporate development director, while Red Sena’s chief financial officer is Ismail Abd Halim, formerly executive director at Khong Guan Enterprise Sdn Bhd.

The SPAC’s business development director is Ian Yoong Kah Yin, who has experience in investment banking and corporate finance, and formerly served as senior vice-president at CIMB Investment Bank Bhd’s retail broking arm. Richard Ong Kuee Hwa, former head of the legal and corporate finance department of Hong Leong Group, is legal and corporate affairs director. He is presently a non-executive director at UOB Kay Hian Securities (M) Sdn Bhd.

“Given the positive outlook and potential for further growth and expansion, we have a ‘subscribe’ recommendation with a target price of 60 sen based on price-to-book of 1.5 times. The target price represents a potential return of 20% over the IPO price,” Mercury Securites Sdn Bhd says in a Nov 26 note.

“The branded packaged F&B business segment has proven over the medium term to be resilient even during an economic slowdown,” it adds.

Meanwhile, Public Investment Bank, which did not ascribe a fair value to Red Sena, said in a Nov 26 note: “We see Malaysia’s consumption expenditure on food has been increasing at a growth rate of about 10%, while small to mid-cap processed F&B listed companies are growing at an average CAGR (compound average growth rate) of around 4%. Hence, we believe there are still opportunities for Red Sena to acquire high-growth small to mid-cap companies in Malaysia.”

RHB Investment Bank Bhd is the principal adviser for the Red Sena IPO. RHB and CIMB Investment Bank are the joint managing underwriters and joint placement agents while Affin Hwang Investment Bank Bhd and AmInvestment Bank Bhd are joint underwriters.

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