SEG (FV RM2.17 - BUY) Corporate News Flash: Technical MGO Triggered

THE BUZZ

SEG International (SEGi) has received a  notice of  unconditional  takeover offer  from Navis Capital through the latter’s fully-owned subsidiary Pinnacle Heritage Solutions SB (PHS) which currently holds  a  27.8% stake in SEGi. The offer is pegged at a  price of RM1.714 per share and RM1.214 per outstanding warrant.

OUR TAKE

Sequence of  the entire saga. To recap, Navis Capital emerged as the single second largest shareholder in SEGi after its fully-owned subsidiary PHS took up 148.5m shares and 61.1m warrants early this month at RM1.71/share and RM1.21/warrant respectively. This makes Navis Capital’s stake in SEGi second only to Dato’ Sri Clement Hii who held 158.9m shares and 76.2m warrants back then. Nonetheless, Navis Capital has acquired another 18.0m warrants from Dato’ Sri Clement Hii yesterday in an off-market transaction, putting itself on the brink of becoming the single largest shareholder in SEGi with its total investment in SEGi now standing at RM349.6m. Upon the full conversion of all outstanding warrants and excluding existing treasury shares of 26.0m, Navis Capital’s stake in SEGi works out to be 31.5%, while Dato’ Seri Clement Hii would in turn hold 30.0% of the company.

Shareholders’ agreement between the two parties. Following  the acquisition of  the said warrants, PHS had entered into a shareholder’s agreement with Dato’ Sri Clement Hii to regulate the rights and obligations of both parties as shareholders of SEGi. And as a consequence of the agreement, the two parties which hold a combined 57.6% stake in SEGi (or an effective 61.5% upon the full conversion of warrants) triggered a Mandatory General  Offer (MGO) on SEGi. With that, PHS proposed to acquire all the remaining 226.0m shares  (ex-treasury shares of 26.0m) and 52.0m warrants in SEGi not held by PHS and Dato’ Sri Clement Hii currently at RM1.714 per share and RM1.214 per warrant respectively. This brings the MGO cost to as much as RM450.4m, assuming full acceptances on both shares and outstanding warrants by minority shareholders. 

Unattractive pricing. In our previous report, we highlighted that  any privatization offer has to be priced at a minimum of RM2.10/share to entice the minority shareholders. The final offer of RM1.714/share is on par with Navis Capital’s entrance cost but fell short of our expectations and it is at a significant 5.3% discount (instead of premium) to its last closing of RM1.81.  Given the unappealing  MGO  valuation which translates into 14.2x FY12 PER and 12.9x FY13 PER based on a fully enlarged share base vis-à-vis our FV of RM2.17 at 18x FY12 PER, we advise minorities to reject the offer.

Source: OSK188