Date: September 27, 2016
Background
On 15 Jan 2016, Halcyon Agri Corporation Limited (“HAC”) announced that it was in discussions with Sinochem International Corporation (“Sinochem”) with the potential transaction involving the combination of HAC, Sinochem’s interest in GMG Global Ltd (“GMG”), and certain natural rubber processing facilities and trading businesses of Sinochem International (Overseas) Pte Ltd (“SIO’s NR Assets”).
On 27 April 2016, SIAS released press statement on SIAS meeting with GMG in respect of the potential transaction.
On 23 Aug 2016, Deutsche Bank announced on behalf of HAC that HAC intend to make the GMG voluntary general offer (VGO). The Offer Consideration shall be satisfied by the issue of new HAC shares on the following basis: GMG Share : 0.9333 new ordinary share of HAC, with an implied offer price of S$0.695
On 23 Sep 2016, GMG issued a circular containing, inter alia, the recommendations of the Independent Financial Adviser (“IFA”) and independent directors on the offer from HAC (“Circular”).
GMG Minority Shareholders Concerns
The IFA has described the offer price as “not fair but reasonable”. Their recommendation has been accepted by the independent directors of GMG.
The IFA compiled a table comparing the key financials and valuation ratios of GMG, HAC and certain similar assets owned by Sinochem referred to as SIO’s NR Assets herein. The table is summarized and appended below in Appendix A.
As the NAV and NTA per share of HAC are significantly lower than those of GMG’s, shareholders of GMG should continue to be concerned over the relative value ascribed to GMG and the considerable unfair dilution of their interest should they accept the Offer. From the table, the implied P/NAV valuation ratio (0.45-0.89) and P/NTA ratio (0.57-1.12) of the GMG offer is the lowest, compared to the HAC and SIO’s NR Assets offer. Also, the implied offer price of $0.695 is at the lower end of the range of “sum-of-the-parts” valuation by the independent valuer of $0.682-$0.862 per share.
Even though the IFA uses information from the table above to form the basis of their opinion that the terms of the offer are “Not fair”, they do not explain clearly the rationale behind their assumptions. For example, even though HAC shares are the consideration for both the GMG and SIO’s NR Assets transaction, the share prices of HAC ascribed for the purchase of GMG and SIO’s NR Assets are different. For the GMG transaction, the IFA uses a range of VWAP prices to calculate the consideration. For the SIO’s NR Assets transaction, the IFA assumed HAC is worth S$0.75 a share. The reasons behind using different share price assumptions should be highlighted and clearly explained for shareholders to make an informed judgement.
It was mentioned in the Circular that GMG’s director Mr Jeffrey Gondobintoro said no decision has been reached regarding acceptance or otherwise on his deemed interest of 11.823% shareholding. Shareholders should be informed of his decision as soon as possible as in the event of his non-acceptance, the listing status of GMG will be preserved.
SIAS notes that GMG’s principal assets are rubber plantations and its principal business activity is that of producing natural rubber. The prices of natural rubber like most of all commodities are at a cyclical low at present.
SIAS notes that Sinochem is the controlling shareholder of both GMG and SIO’s NR Assets. The terms offered by HAC to acquire SIO’s NR assets in this transaction appear to be substantially superior to those offered to the minority shareholders of GMG.
It has been mentioned that a number of synergies can be derived from the combined businesses of GMG and HAC. Shareholders should be informed of management’s plan to integrate the new acquisitions and the financial impact of these synergies.
Can the Offeror also advise on whether there will be any changes to the board and senior management team of HAC? It is noted that the current Executive Chairman and CEO, Mr Robert Meyer, has sold his shares in HAC.
Other concerns centre around the financials of HAC. HAC incurred losses for Jan-Jun 2016 and given the continued depressed market for its products there is no certainty that it could turn around in the near future. Apart from the acquisition of the NR Assets, what are HAC management’s plans to return HAC to profitability?
Shareholders are naturally concerned as to how management of HAC intends to address the high borrowings of S$701m (US$516m) (of which S$277m (US$204m) is payable by 30 Jun 2017), compared with a cash level of S$91m (US$67m) in HAC’s Q2 2016 unaudited financials (cash is in HAC’s books).
Unfortunately, the IFA appears to have made conflicting recommendations to Independent Directors of GMG on the offer to both ACCEPT and to REJECT in the same recommendation which lacks the expected view from the IFA regarding the competitive strengths of the enlarged HAC Group which would allow minority shareholders to make an informed decision. In addition, the independent valuer has valued the sum of separate business units (which is essentially the “breakup value”) to be between $0.682-$0.862 per share, compared to the implied offer price of $0.695. [refer IFA report pg I-30 onwards]. However, the offer price comes with some major disadvantages associated with HAC – the current negative NTA position, high gearing and losses in the first half of FY2016.
Additionally, HAC is offering far superior terms to acquire Sinochem’s SIO’s NR Assets when compared to the terms offered to GMG, both controlled by Sinochem, in the same proposed transaction. Regrettably the IFA has not commented on this anomaly.
In view of the IFA’s opinion that the offer is not fair, will Halcyon therefore, should reconsider their offer in the interest of all shareholders of GMG Global. This will address the concerns of GMG shareholders.
SIAS requests the relevant parties to address urgently the concerns raised by shareholders and in the meantime recommends to shareholders to await the responses before making any decision regarding their shares.
David Gerald
Founder, President & CEO
Securities Investors Association (Singapore)
Appendix A
Comparison table of financials and valuation ratios used by IFA
| Company |
Consideration (S$m) |
Payment type |
Profit/Loss (S$m) |
NAV attributable to shareholders of the company (S$m) |
NTA (S$m) |
P/E (times) |
P/NAV (times) |
P/NTA (times) |
|
GMG |
309-605 (1) |
HAC shares |
(14.5) (4)(5) |
680.9 (6) |
538.6 (6) |
N.M (8) |
0.45-0.89 |
0.57–1.12 |
|
HAC |
450 (2) |
Cash |
(14.4) (5) (10) |
127.1 (6) (10) |
(146.2) (6) |
N.M (8) |
3.54 |
N.M. (9) |
|
SIO’s NR Assets |
210 (3) |
HAC shares |
14.4 (7) (10) |
127.7 (7) (10) |
117.1 (7) (10) |
14.5 |
1.64 |
1.79 |
Notes:
1. Computed using the highest and lowest daily VWAP of HAC shares for the 12-month period prior to 15 Jan 2016, when HAC first revealed discussions on a potential transaction with Sinochem, and up to 14 Sep 2016, multiplied by GMG shares outstanding and the GMG VGO Swap Ratio
2. Computed using HAC shares outstanding multiplied by the HAC MGO offer price of S$0.75 per HAC shares
3. Computed based on issuance of 280m new HAC shares to SIO at S$0.75 per HAC share
4. Adjusted for the S$14.1m loss on sale of SIAT Gabon palm oil assets
5. Based on the aggregate of the most recently announced four quarters earnings
6. NAV or NTA attributable to shareholders of the company as at 30 June 2016
7. Extracted from the Pro Forma Financials of the NR Assets in Appendix D of HAC’s circular dated 16 May 2016
8. Not meaningful as GMG and HAC recorded net losses based on the latest 4 quarters of earnings prior to 30 June 2016
9. Not meaningful as HAC had net tangible liabilities as at 30 June 2016
10. Based on the exchange rate of S$1:US$0.7334
