Thursday, February 21, 2008

Primus Pleases Itself

The Edge: What is it in EON Capital that makes Primus Pacific Partners pay a hefty RM9.55 a share, a near 60% premium on its trading price, to gain a non-controlling one-fifth of the bank and financial services holding company for a hefty RM1.34 billion?

His other pertinent points:
1) why is it that other shareholders, apart from DRB-Hicom, which sold that stake to Primus, don't get to participate in that largesse?
Permitting some shareholders to benefit and exit from a listed company with a high price without the same benefit to all other shareholders is inherently unfair and smacks of insider dealings, which are unhealthy for the development of an equitable equity market. That's a situation that must not continue.

p/s apologies to Moolah, the article cited was written by P Gunasegaram and not Moolah... should have known that cause you and I rarely disagree ... ; )

Primus agreed to pay DRB-Hicom Bhd RM1.34 billion cash, or RM9.55 a share, for its strategic 20.2% stake in EON Capital Bhd, the parent of EON Bank. Primus major shareholders are the Taiwan-based Fubon Financial group, the Qatar Investment Authority and the Kuwait Investment Authority. Fubon is a financial services group in Taiwan engaged in corporate and investment banking, financial markets, consumer finance, wealth management, investment management and insurance.

Early last year, Newbridge Capital Ltd, the Asia-focused arm of US buyout firm Texas Pacific Group had courted DRB-Hicom and both parties came to a preliminary agreement. The two obtained Bank Negara Malaysia approval to start negotiations but the transaction did not go through. It was speculated that Newbridge was worried that it would be holding the largest block of shares but without any management control. Well, it didn't seem to bother Primus. It was considered very unlikely that Bank Negara would allow another foreign party (other than Singapore's interest in Alliance Bank) to control another bank in Malaysia. Primus has to either take the deal or leave like Texas Pacific.

EON Capital Bhd and its banking unit have proposed to issue up to RM655 million unsecured subordinated bonds together with 93.8 million warrants to fund the expansion of its operations.

The country’s seventh-largest bank said yesterday the proposal was to strengthen its balance sheet and place it in a significantly stronger position in the Malaysian and international markets.

“In addition, it will allow EON Bank Group to lock in a lower effective funding cost and would enable the EON Bank Group to better plan its cash flow requirements,” the company said.

The announcement came just a day after Hong Kong-based investment company Primus Pacific Partners proposed to acquire a 20.2% stake in EONCap for RM1.34 billion or RM9.55 per share from DRB-Hicom Bhd. This was 55% over the closing price of RM6.20 that day. EONCap said yesterday EON Bank would issue up to RM655 million nominal value of 4.75% unsecured subordinated bonds while EONCap would issue of up to 93.80 million 2008/2013 warrants. The bonds and the warrants will be attached and issued to primary subscriber(s) or investor(s) on a bought-deal basis. The bonds would not be listed on Bursa Malaysia Securities Bhd or any other stock exchange. The warrants would be based on 93.80 million shares in EONCap and exercisable at any time up to the fifth anniversary of the date of issue. The exercise price is RM7.

The acquisition price translates to an implied FY07 and FY08 price-to-book value (PBV) of 2.2 times and 2.0 times respectively, which was reasonable vis-à-vis recent banking mergers and acquisitions (M&A) transaction in the region. So, there is a strong argument that Primus did not overpay, rather the market price for EON Cap was under-priced. Primus cannot collect from the open market more than 5% without triggering approval requirements.

To be fair to Primus, I think they would have EASILY been able to do a G.O. at RM9.55 for the rest of the shares but that probably would NEVER get past Bank Negara. So, we cannot and should not question whether Primus is acting on some other devious agenda.

What P Guna said is correct, there have been TOO MANY substantial share deals to "favoured parties" at sharply higher premiums to market prices, and that they get a waiver to make a G.O. Now, that is what should not be allowed to happen. Remember the MAS deal, etc... these questionable deals should never have a place in a transparent equity market. The so-called waivers granted is based on discretion, on so called "national interest" argument - bailout say bailout lah... ALL shareholders deserve the same offer price when it triggers the takeover limit.

In Primus case, they did not trigger the takeover limit, so no argument here. It is a willing buyer, willing seller, also no issue here. We cannot force a buyer of a 10%-20% stake to make a mandatory G.O. or even only pay market prices. We cannot say that's the limit you can buy at for a substantial stake. Hence I would have to disagree with P Guna on his second point above. No markets in the world currently forces a buyer of 10%-20% stake to also offer a G.O. Have to play by the rules, that's true transparency.


Moola said...



That article was written by P. Gunasegaram!


EuJin said...

unfortunately a 20

Seng said...

EONCAP continues to decline, and closed 5.25 on Friday - it seems existing shareholders will be very unhappy this weekend that certain shareholders get to get out at $9.55.

Also, Primus Pacific Partners - I guess - will one day show large unrealized losses in their books, if EONCAP share price don't rise. (I don't know who Primus is, and this is not a recommendation to buy EONCAP). If EONCAP stock price don't rise, and Primus get to report reduced/negative earnings, then, what is PRIMUS motivation for proceeding to buy at a premium, given the transparent rules?

Unfortunately, I don't follow this case closely, but it's easy to imagine why layperson (rather than experts) could come to be suspicious when one group of shareholder can get to sell at $9.55, and the rest at market prices like $5.25 around similar times.

To me, transparency whilst desirable is not the main issue. E.g. suppose we have a hypothetical country where there are very, very transparent laws that says that if you steal, your hands will be chopped off, and if you step on public grass, your legs will be chopped off. These rules may be transparent, but I think most citizens will have a problem with the latter law, despite the huge transparency.

So, whilst the rules may be transparent, it still begs the question as to whether this sort of deal is fair. I think this is the sort of policy questions where our regulators and SEC and every stakeholder should pay more attention to and seek ways to overcome such image problems. After all, in text books, most students will have the impression that all ordinary shareholders should be treated equally. In Malaysia, we now know that sometimes(or most times), minority shareholders get screwed. And now, I'm learning that within significant shareholder groups, some major shareholders are more "privilege" than others. Too many similarities with politics? :-)

I personally don't have an answer, and I doubt there is an easy answer.

Nice thought provoking article, though. Thanks.



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