Star : Battle for Palmco gives spark to market
Yap Yok Foo
20th July 2001
Battle for Palmco gives spark to market
THE fight for Palmco Holdings Bhd is hotting up, with the protagonists
Sime Darby Bhd and IOI Corporation Bhd indicating they would not walk
away without taking the prize. The tactics employed by the two
protagonists are reminiscent of the strategies recommended by the
Chinese military philosopher, Sun Tsu in The Art of War.
What is the ultimate gameplan of Sime? Is Palmco just a ploy to
distract and exhaust IOI so that the group itself becomes vulnerable
to a takeover? Has IOI's boss, Tan Sri Lee Shin Cheng, missed the boat
by not going for a mandatory takeover of Palmco much earlier? Or has
he manoeuvred himself in such a secure position that Sime risks being
locked out as a minority shareholder in Palmco?
Star Business senior writers, B.K. SIDHU, JAGDEV SINGH SIDHU and
reporter KATHY FONG attempt to answer some of those questions in this
Special Focus.
They also look at why Palmco is such an attractive prize, as well as
examine other likely takeover targets in the fast changing Malaysian
corporate scene.
THE battle for Palmco Holdings Bhd has delighted punters and
stockbrokers alike.
"We need triggers to give spark to our lethargic market, and the
Palmco fight is just what the market needs," said an analyst.
But as the fight for Palmco enters its second week, there is growing
belief that Sime Darby Bhd's gambit may just be a smokescreen for the
ultimate prize: IOI Corporation Bhd.
"The battle for Palmco is like a game of poker. It is a question of
who folds first," said the head of research at a local stockbroking
house.
Palmco itself is a great asset for any company to have in its stable
particularly a plantation group and no one will attest to that more
than IOI.
Being the largest oleochemical producer in Malaysia, and possibly
South-East Asia, Palmco has acted as a natural hedge for IOI's profits
when palm oil prices are depressed, and is contributing about 20%.
On an annualised basis, Palmco is on track to make about RM120mil for
its financial year ending June 2001.
Considering Palmco is a lucrative business for IOI and Sime, and the
potential for a protracted bidding process is great, the performance
of its share price after Sime raised its offer is somewhat baffling.
Yesterday, Palmco shares fell 2 sen to RM4.64 just four sen above
Sime's revised offer. Palmco warrants shed 11 sen to RM1.69.
Conversely, the share price of IOI rose 32 sen to RM3.64 and its
warrants were up 15 sen to 58.5 sen each.
"The performance of IOI and Palmco is going in the opposite direction.
One would expect Palmco's share price to rise since it's the target in
the bidding war," said a plantation analyst at a local stockbroking
house.
Market observers had earlier expected the price of IOI to fall as it
is generally expected to incur higher levels of borrowings than its
current gearing level of 26% to retain control of Palmco.
A research manager at a foreign stockbroking company reckons if IOI
were to increase its offer for Palmco to RM5 per share, its gearing
level would increase to 40%.
Even though IOI may take on additional borrowing to gain 100% control
of Palmco, the deal will be earnings positive for IOI up to a certain
level of about RM7.50 per share meaning IOI can bid Palmco up to
RM7.50 per share before its earnings deteriorate.
The same can be said of the effects on earnings of paying a much
higher price for Palmco for Sime. But analysts see Sime as having the
ability to pay a higher price for Palmco (about RM8.50) before the
acquisition forces its earnings to dilute.
Some analysts said IOI's share price moved significantly higher
yesterday because the market believed the company would emerge as the
ultimate winner.
In this scenario, Palmco's strong earnings would add positively to
IOI's bottom line.
Some observers say the poker hand is finally being revealed.
IOI now has about 42% of Palmco, and analysts see the chances of Sime
wresting control getting slimmer by the day.
IOI would only need a further 8% of Palmco to shut the door on Sime's
attempt to take over the company.
Another point to consider: has IOI already obtained support from
friendly Palmco shareholders to put it over the 50% line. If that's
the case, then the game is already over.
The big worry for IOI supporters is that the company would increase
its level of borrowings and use valuable financial resources to defend
its hold on Palmco, thus making IOI itself vulnerable a takeover bid.
"IOI is like a mini Sime with significant interests in plantations,
property and manufacturing. It makes a lot of sense why Sime may want
to acquire IOI as there is considerable synergy for Sime," said the
head of research at a foreign brokerage.
Supporters of the theory that the real target of Sime is IOI argue
that Sime could build a similar oleochemical complex to Palmco's for
RM500mil.
But for Sime to get 100% of Palmco would cost around RM900mil.
It may well be that Sime has to pay a premium because Palmco will come
with an existing base of expertise, track record and contracts, but
Sime's Palmco bid could be the first stage of a larger game plan.
One analyst said given the shareholding of IOI executive chairman Tan
Sri Lee Shin Cheng and his family of around 40% in the company,
pulling off the acquisition of IOI would not be an easy feat even for
such a cash-rich giant like Sime.
One plantation analyst estimates that it will cost Sime about RM3.5bil
to buy the operations of IOI, and if IOI's huge land-bank of
plantations is revalued in any acquisition, that could push the price
tag to about RM5bil, or about RM6 per share.
And that does not include the value of IOI Properties Bhd to IOI.
"It'll just be too pricey for Sime as it would have to borrow nearly
RM4bil to buy IOI," said the analyst. "I believe Sime's target is
Palmco, but the theory that IOI is the real target is an interesting
one."
==============================
Analysts: 12 firms ripe for takeover
PALMCO Holdings Bhd is not the only company which is a takeover
target. According to analysts, at least a dozen desirable companies
are ripe for the picking.
Analysts said there are a good number of well-managed companies with
promising earnings potential, but which were trading on low
price-earnings ratio (PER) and below their net tangible asset (NTA)
value.
Their low share price makes them attractive and affordable takeover
targets.
A merchant banker said: "Companies which are on the prowl to acquire
more business should consider doing it now because the share prices of
some vulnerable targets have been beaten down."
According to online financial portal, Surf88, car distributor Edaran
Otomobil Nasional Bhd (EON) and construction-based Bumi Armada Bhd are
attractive potential takeover targets.
"Bumi Armada has a high level of secured earnings and has achieved
consistent return of equity of about 30% year after year (apart from
1997 when it suffered a foreign exchange loss due to the ringgit
crisis).
"At current share price, the stock is valued only at less than 5 times
PER and offers more than 20% earnings yield for a potential predator"
Surf88 said.
According to Surf88, Land and General Bhd has a 46.4% stake in Bumi
Armada, and it might be willing to sell if the price is right.
On EON, Surf88 said: "At RM8, EON is trading at a 16% discount to net
tangible asset of RM9.55 as of March 2001.
"In the first quarter ended March 2001, the group turned in 43 sen in
EPS despite forex translation loss linked to an indirect Indonesia
associate. Assuming full year EPS of RM1.60 RM1.70 (which is lower
than actual EPS of RM2.11 last year), the stock still trades at no
more than 5 times PER.
"An investor paying RM8 per share now is making an earnings return of
20%. Just think how attractive this is for the potential enhancement
for any acquirer! The argument is no less compelling than the case of
Palmco, perhaps even more so."
If the current low share price scenario occurred in the Western world,
companies which are traded below NTA would have been bought over by
"company raiders."
This was a trend in the US during the early 1980s, said an analyst.
Company raiders, often regarded as business groups with ample
financial resources, usually execute hostile takeover of companies
whose share prices are below their asset value.
They will then sell off the valuable assets of the takeover victims to
make quick profits.
That is why Western managers pay great attention to the share prices
of their companies a company languishing with a depressed share price
will attract corporate vultures. This is one of the risks of being a
publicly-listed company.
A hostile takeover attempt is not a common occurrence in the Malaysian
corporate sector compared to the Western business world where
companies fight hard in the bidding battles to defend their interest.
The main reason is that the shareholding structure in Malaysia is much
more concentrated in the hands of one, two or three majority
shareholders. The majority stake in a Malaysian company is usually
held by a family, a large institution or a government agency.
Hence, a hostile takeover attempt is more difficult in Malaysia.
In the West, company ownership is spread over a wider number of
shareholders, and quite often directors do not hold any shares or only
a small number of shares.
Because of the wide share ownership, and also the Western corporate
culture, takeovers are a common affair.
"Most of the takeovers in Malaysia are done in a friendly way. A party
which is interested in taking over a company will try to come to an
understanding with the company's majority shareholders before
announcing the terms and conditions.
"The takeover will stand a high chance of success once the majority
shareholder agrees to the deal," said a merchant banker.
So far, there have been very few successful hostile takeovers in the
local corporate scene. One notable example is the takeover of the
Pengkalen Group by Malayan United Industries Bhd (MUI) from the Tan
family. But MUI paid a hefty price for its success; so it was more a
case of winning the battle, but losing the war.
A local hostile takeover which failed was when the Yeap family of
Penang rejected the mandatory offer by United Merchant Group Bhd for
the stake in the former Ban Hin Lee Bank (BHL).
BHL is now merged with Southern Bank Bhd under the government's anchor
bank policy.
An analyst expects the level of takeover activity to increase in the
coming months because of the much improved business environment.
He said foreign investors had started to return to Malaysia in a big
way, as evidenced by investment decisions by the Telenor group of
Norway, Intel and Conoco of the US, Fortis International of Belgium,
and Hutchison Whampoa of Hong Kong.
"The entry of these big foreign companies gives confidence to local
companies that the Malaysian economy is okay and things are getting
better" he said.
He said a few acquisitions were expected to be finalised in the next
six months.
The merchant banker said companies were more inclined to launch
takeover bids when the stock market was coming out of the doldrums
because they expect the companies' values to appreciate in the future.
"The recovery of the share prices will boost business confidence," he
added.
However, a head of research pointed out that companies should not rush
into making acquisitions even though the pricing was attractive.
"There should be strategic value created through acquisitions," he
added.
=============================
Palmco no new-comer to corporate moves
AS FAR as corporate exercises go, Penang-based Palmco Holdings Bhd has
seen it all hostile bids, takeovers, cross-shareholding and boardroom
tussles.
Last Thursday, Palmco found itself the prized target of two of
Malaysia's most respected conglomerates Sime Darby Bhd and IOI
Corporation Bhd.
Sime started the takeover battle with a courtesy phone call by its
group chief executive Tan Sri Nik Mohamed Nik Yaacob to IOI boss Tan
Sri Lee Shin Cheng informing him of Sime's intentions.
Tan Sri Nik Mohamed Nik Yaacob
It then informed the KLSE that it was making a voluntary offer for
Palmco at RM4.35 per share and RM1.35 for each of its warrants.
IOI immediately countered with an announcement that it would not
accept the offer, and the next day it exercised the conversion of its
Palmco warrants which increased IOI's stake in Palmco to 36.1% from
32.0%.
Then on Monday, IOI announced a mandatory general offer (MGO) for the
remaining Palmco shares and warrants at prices matching the Sime
offer.
The next couple of days saw both Sime and IOI aggressively buying
Palmco shares in the market.
Sime bought 22% of Palmco at RM4.60 per share in an off-market deal
and increased its voluntary offer to RM4.60 per share.
The IOI group also increased its stake to 41.79%, but kept its MGO at
RM4.35 per share.
A decade ago, the founders of Palmco Chan brothers of Penang--were up
in arms when the Johor State Economic Development Corp (JSEDC)
launched a hostile bid to gain control of the company.
Prior to that, Palmco was involved in a cross-shareholding fight and
later a boardroom tussle.
But what is it about Palmco that has led to these hostile bids,
takeovers and boardroom tussles?
Today, Palmco is a well-managed and profitable company even though
several years ago its accounts were in the red due to several factors
such as low crude palm oil (CPO) prices and over-expansion.
Palmco is one of the global leaders in the field and is said to be the
largest manufacturer of fatty acids in Malaysia and South-East Asia.
The company runs its palm-based operations from its factory complex in
the Prai industrial area in Penang.
Control of Palmco provides strong synergies for both Sime and IOI,
which are major plantation groups anxious to go into downstream,
valued-added activities.
Lee Yeow Chor
An analyst report said Palmco's operations had been rationalised and
are running efficiently. The plant operates close to full capacity.
"The balance sheet is much cleaner the RM234mil net debt position (in
1997) has reversed to a net cash position of RM76mil (at March last
year)," the report said.
Palmco produces a wide range of products such as fatty acids,
glycerine, soap, noodles, metallic stearate and fatty esters.
Palmco's major export markets include Asia, Europe and the US. In Asia
its major export markets are Japan, South Korea and Taiwan.
It also has a 30% joint venture with Kao Corp of Japan for the
manufacture of methyl esters and fatty alcohol used in personal
healthcare products.
In addition, the company has upstream operations in the form of palm
kernel oil production and 6,094ha of palm oil estates, chiefly in
Sabah.
The company is also into property development and has built several
apartments and condominiums, particularly in Penang. And it also owns
the Casuarina Beach Resort in Batu Ferringhi, Penang.
Palmco was incorporated in November 1976 as a private investment
company to acquire the entire shares in four related palm oil
companies Palmco Oil Mill, Palmex Industries, Palmina and Acidchem
(M).
Other main operating subsidiaries under its fold then were Palmco
Bina, Palmco Jaya, Credit Leasing Corp and Palmco International (HK).
Palmco started as a family-owned business by the Chan brothers. Datuk
Robert Chan Woot Khoon was group managing director of Palmco for many
years before he became chairman. The other brothers are Steven Chan
Fook Koon and Edmund Chan.
The company was listed on the KLSE in early 1981. Subsequently, in
April its shares were listed on the Stock Exchange of Singapore.
It was in 1987 that Palmco got involved in a cross-shareholding
venture with Berjaya Corp. The deal later turned sour.
And in 1990, Palmco managing director Steven Chan was booted out. This
led to the parties filing civil suits in court.
Tan Sri Lee Shin Cheng
Subsequently, two shareholders JSEDC and Kulim Bhd called for an EGM
and requisitioned the resignation of Robert Chan and Steven Chan.
By a twist of fate, the Chan brothers managed to regain control of
Palmco after receiving 58% of the votes at the EGM.
Amid all this, another contender suddenly appeared. Mega First Corp
subsidiary Mamut Copper Mining emerged with a 2.3% stake in the
company.
However, Mega First managing director Datuk Lim Keng Kay (brother of
Primary Industries Minister Datuk Seri Dr Lim Keng Yaik) denied acting
in concert with any party to take over control of Palmco when JSEDC
was in a tussle with the Chan brothers.
This led to a chase for Palmco shares since both JSEDC and Mega First
were busy accumulating them on the open market.
JSEDC ended up with a 27% equity interest, Mega First 26.62% (later
33.3%), and the Chan brothers 26%.
In September 1991, Mega First's Lim was appointed Palmco group
managing director.
The parties patched up when a JSEDC representative was appointed to
the board.
In 1993, JSEDC's control in Palmco ended with the resignation of its
two representatives, Haris Abdul Hamid and Syed Mohamed Syed Ibrahim.
In 1995, Mekar Idaman Sdn Bhd, which clinched a 25-year concession to
operate the Penang Bridge, launched a reverse takeover of Acidchem
Bhd, a subsidiary of Palmco.
In 1996, Michael Tiah Thee Seng took over as group managing director
from Lim Keng Kay, who retained his position as executive chairman.
In 1997, IOI emerged as shareholder when it bought a 32.96% stake in
Palmco from Mega First for RM249.2mil cash or at RM4.35 a share. IOI
said the purchase of Palmco was a synergistic move.
Last year, Zulkifli Hussain, a minority shareholder with a 5% stake in
Palmco, sought a court order for IOI and its managing director Tan Sri
Lee Shin Cheng to make a mandatory general offer for the remaining
Palmco shares.
The entry of Sime in the Palmco saga has delighted minority
shareholders like Zulkifli. They can now unload their shares at
RM4.60.
The outcome of this keenly contested tussle is eagerly awaited and
will change the corporate landscape of Palmco.
**************From Uncle Yap**************
Berita Malaysia - The Malaysian News & Discussion Group
===========================================
Archives/manage subscription: http://groups.yahoo.com/group/beritamalaysia
To subscribe by e-mail, send empty e-mail to:
beritamalays...@yahoogroups.com
To unsubscribe by e-mail, send empty e-mail to:
beritamalaysi...@yahoogroups.com
bmalaysia - Just The Malaysian News
============================
Archives/manage subscription: http://groups.yahoo.com/group/bmalaysia
To subscribe by e-mail, send empty e-mail to:
bmalaysia...@yahoogroups.com
To unsubscribe by e-mail, send empty e-mail to:
bmalaysia-...@yahoogroups.com
