Monday, October 23, 2006

Securities Commission Ruling Needs Further Explanation

Subject : SIME DARBY BERHAD - RULING FROM THE SECURITIES COMMISSION IN RELATION TO THE OFFER PRICING OF CONVERTIBLE SECURITIES IN RAMUNIA HOLDINGS BERHAD PURSUANT TO POTENTIAL MANDATORY OFFER FOR SUCH SECURITIES IN THE EVENT AN AGREEMENT IS REACHED ON THE POSSIBLE ACQUISITION OF A CONTROLLING STAKE IN RAMUNIA ("POSSIBLE ACQUISITION")

Contents : Reference is made to the letter by the SC dated 11 October 2006 (which was received on 12 October 2006) in relation to the Possible Acquisition. On behalf of SDB, CIMB Investment Bank Berhad wishes to advise that the Company is currently still in discussions with the vendor in relation to the Possible Acquisition. On 29 September 2006, for the purpose of seeking clarification on the requirement of the Malaysian Code on Take-Overs and Mergers 1998 ("Code") with regards to the pricing of convertible securities pursuant to a mandatory offer, CIMB on behalf of SDB, had written to the SC seeking the SC Ruling in relation to the offer pricing structure for the convertible securities in relation to the Possible Acquisition ("Ruling Application"), in view of the unique characteristics of certain convertible securities and the requirement for a comparable offer for such convertible securities under the Code.

Summary details of the Ruling Application are as follows:(i) Apart from the Employees Share Option Scheme ("ESOS") options expiring in mid May 2010, Ramunia has in issue the following securities:
1) Extracted from Ramunia's latest Annual Report 2005.
2) Exercise price of Warrants is RM0.55 per Warrant, expiring end December 2014.
3) 5-year 1% non-cumulative ICPS, each convertible into 1 new ordinary share in Ramunia upon its maturity in end December 2009.
4) 3-year 1% ICULS, each convertible into 1 new ordinary share in Ramunia upon its maturity in end December 2007.

(ii) The ICULS and ICPS have the following characteristics (among others):
(iii) In the event the Possible Acquisition materialises, pursuant to Part II of the Code, the Possible Acquisition would trigger a MO obligation on the part of SDB, whereby SDB will be required to offer to acquire all the remaining ordinary shares in Ramunia not held by it ("Offer Shares") subsequent to the Possible Acquisition ("Ordinary Shares Offer").
(iv) Further, in the event the Possible Acquisition materialises, pursuant to Section 30(1) of the Code, SDB is also required to offer to purchase those convertible securities in Ramunia not already held by it (save for the ESOS options which requires conversion into ordinary shares prior to acceptance of the Ordinary Shares Offer) subsequent to the Possible Acquisition.
(v) In view of the above, in the event the Possible Acquisition materialises, SDB proposes to adopt the following offer pricing structure for the ICULS, ICPS and Warrants in Ramunia: Pursuant to the SC Letter, the SC had approved the Ruling Application subject to the following conditions, should the Possible Acquisition materialise and a MO needs to be undertaken by SDB:

(i) If Scenario 1 above is adopted, such ICPS should not be allowed for early conversion before its stated maturity date. Further, the M&A of Ramunia should not be amended to allow for conversion at any time in the future.
(ii) The ICULS holders be allowed to convert their ICULS, and as such, SDB should accept at the Ordinary Shares Offer price if ICULS holders accept the MO by tendering the acceptance form together with their notice for conversion during the offer period, in line with Scenario 2.
(iii) A preliminary announcement to be made immediately by SDB to Bursa Malaysia Securities Berhad, in respect of negotiations with the vendors for the Possible Acquisition, and CIMB's application on the proposed pricing structure together with the SC's decision. At this juncture, SDB has neither reached an agreement with the vendors nor decided on any firm offer pricing structure in relation to the Possible Acquisition. Appropriate announcements will be made by SDB as and when there is material development in relation to the Possible Acquisition. This announcement is dated 17 October 2006.

My Take - Based on the ruling by SC, it only meant that there is no EARLY CONVERSION, which are the terms of the P instruments - that is correct. SC can choose to allow for conversion also if it so chooses, the deliberation would be whether it would be detrimental to minority shareholders. The answer would be NO, the P holders have priority over normal shareholders in the event of a wind up, so allowing them to convert and treat them as raking parri-passu with normal shares would be a plus for everyone.

Even though the SC does not allow for early conversion, it does not mean the P will be priced at a discount. That is another matter entirely. If Sime Darby only offers a weighted average price for the P, the company will have to brace themselves for quite a backlash, plus the SC may not allow that. Hence all common sense prevailing, Sime Darby better offer SAME price for mother share and P of Ramunia. That's because the P, as in Preference share is first in line in the event of a winding up. Pref shares are there usually because they pony up capital/loan to the company. Sometimes they trade at a discount because they are only convertible at the end of a specified period.

WARNING TO SECURITIES COMMISSION - If Sime Darby offers to buy the Prefs at a discount to the mother share, AND the SC allows that, the SC will then change the entire valuation and business paradigm for issuance of Pref shares. WHO WILL WANT TO PONY UP MONEY TO GET PREF SHARE IF THEY GET TREATED LIKE SECOND RATE CITIZENS??? The SC can end up changing the entire sub-set of that market. So, brain cells intact, I hope the SC is not so stupid. Plus that Sime Darby and CIMB are not so stupid as to try and buy the Pref at a discount to mother share.

p/s the writer hereby declares that he does not own any Ramunia or Ramunia-P... but have friends who own tons of it .... lol

1 comment:

Chairman Q said...

I really appreciate your comment. I interpret the ruling of P by SC as follows: if the G.O. price for ord. shares were, say, RM1.30 and the last transacted price of ord. shares and P were, say, RM1.20 and 80 sen respectively, prior to the signing of S&P, then the G.O. price for P would be 90 sen (i.e.RM1.30 - (RM1.20-0.90)). One would think SC should allow immediate conversion or at discount from RM1.30 based on time value. By tagging a differential to the G.O. price of ord. invites price manipulation since the free float of P is very much less and can be manipulated to maintain a deep discount.