Friday, November 04, 2005

How Not To Do A Deal - Modular & Blue-I

As reported in The Edge Daily, Modular Techcorp Holdings Bhd has obtained the approval from the majority of the shareholders to buy a major stake in telecommunications services provider, Blue-i Network Sdn Bhd for RM21.5 million cash. Some shareholders had queried Modular's board over the acquisition of the 70% stake in Blue-i. The EGM, which was held in Kuala Lumpur on Nov 2, lasted over four hours. The acquisition of Blue-i will be funded by bank borrowings of RM10 million and the balance from its internally generated funds.

Dali: Why was the deal in cash? Would it not be better to issue new shares to Blue-I vendors? Or a part cash, part shares deal?

... and why was the meeting held on the week of Deepavali/Hari Raya holidays.. isn't it more prudent to have hold the meeting during a time where the public would not be taking extended leave... or is it that the company wanted less people to attend... I believe, if the deal is solid, and the terms are fair, plus the deal is value enhancing - I would want to ensure that all shareholders get to have a say in approving the deal, especially when it is a "substantive" deal relative to the size of Modular...

Its chairman Ibrahim Hussain told reporters after the EGM that shareholders' queries ranged from the fair price to the synergies from the purchase. He said Modular would be able to leverage on its existing market of over 15 million bank card holders and university clientele to develop post-issuance applications using Blue-i’s mobile communications, computer and internet protocol solutions. Ibrahim said the exercise, expected to be completed by the fourth quarter of year, would contribute positively to the group for the financial year ending Dec 31, 2006 as Blue-i had made a profit guarantee of not less than RM6 million for FY06.

Dali: Blue-I's vendors are guaranteeing RM6 million profit for 2006... you know, you can easily list with RM6 million profit on Mesdaq... heck, even half the companies on Mesdaq don't make RM6 million a year (I am just guessing here, too lazy to do actual research, but I don't think I am wrong..). So, to give up a listing status, for what... for the client base that Modular has?? Still, there are better ways to do that, Blue-I could have a joint venture with Modular to do the same thing, and still keep its independence and still go for a listing! Why? Why? Why?

For the proposed acquisition, Modular Techcorp has inked a share sale agreement with vendors Alex Sashitharan Rajadurai and Ng Boon Choong, who held 600,000 ordinary Blue-I shares of RM1 each, representing a 50% of Blue-I’s paid up capital. Both vendors are also two of the directors of Blue-I. Under the guarantee, Blue-I must make a minimum net profit of RM6 million for the financial year ending Dec 31, 2006. In the event of a shortfall in the net profit, the retention sum of RM4.2 million would be used to make up for the shortfall and the vendors would pay any remaining difference.

Dali: ..... Tell you what, I can even give a better guarantee to Modular, I will give a profit guarantee of RM12 million (double that of Blue-I's vendors) for 2006. Since I am getting RM21.5 million, I don't care if Blue-I makes ZERO profit in 2006 as RM21.5 million minus the RM12 million that I would have to make up would still leave me with RM9.5 million cash.

For the financial year ended Dec 31, 2004, Blue-i’s net profit stood at RM1.14 million on a revenue of RM19.95 million. He said Modular would also be able to tap into Blue-i’s network of retail and corporate customers to further enhance the business of applications of bank cards for financial transactions. “Modular believes that the established network of call shops under Blue-i and its ability to deliver innovative products would give the company the competitive edge,” he added. He said the company had plans to make inroads into other countries over a year, replicating its smart card technology and also market Blue-i’s products overseas.

Some Questions That Needs To Be Answered

1) Why an all cash deal? This type of deal brings out a lot of queries. For a typical company with a limited history such as Blue-I, a more prudent deal option should have been considered. How about a deal to buy 33.3% of Blue-I now by issuance of new shares in Modular, with Blue-I vendors to guarantee profit of RM6 million for 2006, and a stipulation that the vendors cannot sell their shares till guarantee is met. If the guarantee is not met, the shares will be sold to make up for profit guarantee shortfall. Upon satisfctory completion of profit guarantee in 2006, it will trigger an option by Modular to buy another 33.3% for RM7 cash. Now isn't this a more prudent deal?!!

Don't do a deal that insults the intelligence of an average investor; or lowers the integrity of the stock exchange and its regulators; and one that tramples on the rights of the minority shareholders - we are all smarter than that, and this is not the 80s or 90s anymore!!!

2)If the deal is so good, why doesn't Blue-I vendors take Modular shares instead, cash is cash but a good scalable deal means 1 + 1 = 3 or even 7, hence taking Modular shares would be better.

3) Why is the guarantee only for one year? And as I have pointed out earlier, the guarantee does not make sense as the vendors can screw around with guarantee and still wind up taking home almost RM10 million cash. Has this deal been really well thought out? My, my, there are more holes in this deal than a block of cheese... and smellier too!

4) RM21.5 million for a 70% stake equates to valuing Blue-I at RM30.7 million. At that purchase price, Modular is paying for 26.9x historical PER. What is even more absurd is its NTA is just RM1.45 million. RM30.7 million market cap and only NTA of RM1.45 million.... hello... anybody home??? That kind of valuation is still justifiable... if you are Skype, Shanda, EBay or or if you hold a patent/technology advantage... any thing... don't be shy here... Blue-I is a simple company leveraging on technologies that are already 5-10 years old, plus much of it Redtone has already conquered... why the exorbitant premium???

5) Where are the directors? Have they been asking the right questions??? What about the independent directors?? Why does Modular go and borrow RM10 million to fund the deal?? Isn't it better to issue new shares in Modular?? The silence is deafening.

At the end of it all, anyone who has had a few years experience in investments or finance will know what the Modular/Blue-I deal is all about... the thing that makes me angry is the sheer audacity and blatantness of the proposal... come on, at least try and structure a much better deal so that our intelligence is not insulted (if you must beat your children, don't let us see the blue-black marks lah..)


dewwy peterson said...
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Smokey said...
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ricardovilla said...

Dear SD,

The deal sucks for the Minority Interests but wouldn't it be a dream that this water fish actually existed for a certain company which you know of say around 3 or years ago.

Its price is even higher than that of 17 million which was offered for that certain company and is laughable by current market conditions. The possible reason why it is all cash is that the Modular people wants to avoid SC intervention. Obviously, some people are getting very rich at the expense of the financiers...

Salvatore_Dali said...


Well, at least some minority shareholders have lodge their complaint to the SC hoping that they will act on it. Will be interesting to see what the SC will do, esp since the deal has already been passed at the shareholders' meeting - it will set an important precedent - minority shareholders will "know" whether it is possible to protest AFTER a deal has been passed... a lot of ramifications here. If the SC has the will, it will block and reassess the terms of deal and interview the relevant parties before making their next step. However if the SC do step in, we are exposing a Pandora's Box here as it means even if you have sharehholders' approval, its not reall a done deal... things can still happen.