TheEdge Weekly asked the question: WHY NO PREMIUM
Scientex is one of the world’s largest producers of stretch films. Scientex also produces BOPP films with an annual production capacity of 60,000 tonnes.
The company also produces cast polypropylene (CPP) and metallised films with an annual capacity of 12,000 tonnes, the biggest producer in the country.
“This merger will enable Scientex to offer an integrated range of products to a larger client base and enhance its capabilities in the flexible packaging business through synergistic and complementary products to better serve global clientele. Scientex also intends to maintain Daibochi’s listing status on the Main Market of Bursa Malaysia, and retain all the management and staff,” Scientex spokeperson said.
“We believe it is good value for Scientex to acquire Daibochi on [a] PER basis, with about 20 times PER for Daibochi’s FY17 (financial year ended Dec 31, 2017) earnings, 16.5 times for FY19, and 12.3 times for FY20. Industry average PER is about 15 times excluding Tomypak Holdings Bhd.” - TA analyst
Daibochi is a leading flexible packaging provider in the South East Asian region, with manufacturing plants in Malaysia and Myanmar.
Rationale:
1) The pricing based on current and forward PER was fair and slightly higher than the industry average.
2) Why should there be a premium??? A premium suggests that current prices were undervalued. Was Daibochi undervalued? Why should there be a premium - Daibochi's share price could have been at RM1.20 or RM1.60 or RM1.80 when the deal is struck... at differing prices you would have called in undervalued, overvalued, etc... why base your opinion on the average price for the last 30 days. Historical prices is but one minor factor. Hence most M&A of established businesses (not startups or tech firms) would use PER or forward PER, as that will show whether the deal was PER accretive to the buying company.
3) Why there is no premium - Probably, I am guessing here, was because there were 14 shareholders in Daibochi. When you have 14 drivers in a Proton you won't get far. Even if you have an appointed leader, it will never be as smooth or as decisive as one person with the substantial block.
4) The main key why there was no premium - Well, it is not a cash sale... it is a swap. A swap means the future fortunes of Daibochi shareholders will be in the merged entity under Scientex. They will be getting Scientex shares. There is really NOT MUCH point to do a "severe deal" for themselves as then it would weaken Scientex share price anyway (which they would be getting shares in). Just a proper arms-length deal that satisfies the regulators would do.
5) Listing Status - Part of the reason for the lack of premium was that Daibochi's listing will be maintained. Everyone knows there is a RM20-40m premium for a Main Board counter. Scientex can sell Daibochi listing status later, which will be reflected then in higher Scientex prices, which would be what current Daibochi shareholders will be holding.
6) Control - That would be the only issue that might give rise to a premium. Losing control. But can the existing G14 move the company to the next level. Control is not everything. Malaysians have this silly over estimation of the need for control. Contro, is only important if you are mainly going to do shenanigans. Otherwise, any deal must be weighed by their accrued financials. Is 1+1 more than 2. If yes, then it is a good deal.
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