DFZ injection into Esmart good for minorities?

Atlan Holdings Bhd’s plan to inject DFZ Capital Bhd into Singapore-listed Esmart Holdings Ltd as part of a reverse takeover (RTO) exercise will pass easily, but the question is whether the deal is good for DFZ minority shareholders.

On the face of it, it looks like DFZ minorities may have to take a discount as the proposed sale is being done at a price that’s lower than its recent market price. However, minorities still could stand to benefit if they are offered the same terms that Atlan has received.

So far as Atlan shareholders are concerned, the disposal of DFZ is a handy piece of business netting them some RM362 million based on Atlan’s initial investment of RM118.2 million for the stake in 2008. The issue, therefore, is with DFZ shareholders.

Atlan announced on Monday it would dispose its 74.7% equity stake in DFZ along with its wholly-owned subsidiary Darul Metro Sdn Bhd to Esmart in exchange for 18.1 billion new Esmart shares and 1.8 billion free warrants. The transaction was valued at S$285.36 million (RM662.6 million).

Based on the Bursa Malaysia announcement, Atlan has valued its DFZ stake comprising 156.86 million shares at RM480.59 million or RM3 per share. In exchange for its DFZ holding, Atlan will receive 12.7 billion new ordinary Esmart shares at an issue price of S$0.015765 and 1.27 billion free warrants.

In other words, Atlan will receive about S$200.2 million (RM470.5 million) in Esmart shares while the difference is ostensibly made up by the warrants, which carry an exercise price of S$0.0175. The warrants have a tenure of five years from their date of issue.

Esmart’s value add to Atlan is the fact that it is a Singapore-listed entity. Atlan said in the announcement that Esmart’s present business, which is in electronics manufacturing, would be disposed within 30 days of the completion of the exercise.

Atlan said the plan was to grow its business regionally, using Esmart’s listing status in Singapore as the platform. DFZ’s business would remain unchanged, Atlan added. The company also said it did not intend to maintain DFZ’s listing status.

At the end of the corporate exercise, Atlan will have a 96.24% stake in Esmart. The purchase of Atlan’s DFZ stake by Esmart will trigger a general offer (GO) for all remaining outstanding DFZ shares, and the question for minorities is whether it will be a good deal.

Atlan has said Esmart would acquire all outstanding DFZ shares through a share-and-warrant exchange or an alternative cash option. The final offer with details of the consideration will only be announced after the conditions pursuant to its agreement with Esmart have been met.

If Esmart offers a straight cash offer of RM3 for every outstanding DFZ share, then the offer is less attractive to minorities. DFZ shares have traded above the RM3 mark since Jan 19, 2009. Esmart could also opt to offer a higher price for minority shareholders.

If, on the other hand, Esmart offers the same deal to minorities as it offered Atlan, namely a share and warrant swap, then minorities could still ride on Esmart’s upside post-RTO.

Based on the announcement, DFZ shareholders could see their one DFZ share traded for 81 Esmart shares and about 8.1 free Esmart warrants. Given the potential upside of Esmart after the RTO, shares in Esmart may be a better offer for minorities.

However, there may be a problem with the cross-border transactions as Esmart may need dispensation from Bank Negara Malaysia (BNM) to offer Singapore shares to Malaysian shareholders.

A precedent was set with Wilmar International Ltd when it purchased PPB’s plantation arm — PPB Oil Palms Bhd — in 2007. Then, Bank Negara had initially imposed restrictions on Malaysian shareholders who accepted Wilmar’s offer, but this decision was later waived.

It remains to be seen whether Esmart will require BNM’s approval this time around. The offer, however, will depend on Atlan’s exercise being first approved by Atlan and Esmart shareholders.

A corporate finance banker told The Edge Financial Daily that since DFZ was considered an asset under Atlan, the latter would simply need a simple majority to dispose of the stake.

Atlan’s substantial shareholders include its chairman Datuk Seri Adam Sani Abdullah, who holds a 35% total stake, with the majority being held by his vehicle Distinct Continent Sdn Bhd.

DFZ yesterday rose 21 sen to RM3.48, with 27,800 shares done after the announcement on Monday. Meanwhile, Atlan shares rose one sen to close at RM3.26 with 19,000 shares traded.

The impact of the announcement was more pronounced in Singapore where Esmart’s share price rose to S$0.02 from S$0.015 with 6.47 million shares transacted.

Atlan said the exercise was expected to be completed by the fourth quarter of its financial year ending Feb 28, 2011.



This article appeared in The Edge Financial Daily, June 30, 2010.