TANJONG offer: To accept or not to accept?

Tanjong plc was the top gainer on the local bourse yesterday.

The stock, which resumed trading yesterday after a three-day suspension and the announcement of a privatisation proposal, surged RM3.56 to RM21.14, which is just 3% below the privatisation offer price of RM21.80.

Yesterday, Tanjong reached an intra-day high of RM21.30 and a low of RM21.08, on volume of 3.06 million shares.

Most research houses and analysts have given the thumbs up to the deal, citing the heavy premium on the trading price and estimated target price as reasons for shareholders to accept the offer. The offer price represents a 24% premium above the pre-suspension price of RM17.58.

“(The offer price) partially factors in future growth accretion. Our estimates suggest future power acquisitions amounting to some 2,000MW over the next two years could enhance our fair value by RM2.80 to RM3.20 per share in equity value to RM21.60,” said OSK Research.

It said the offer price was attractive as investors could recoup instant gains, whereas they would have to wait two to four years to realise upsides from acquisition or organic growth.

Citi Investment Research stood out from the pack, being one of the few which said that “the offer price appears low for full control and privatisation of Tanjong”. However, it did not specify the ideal offer price range or offer further information.
The Edge Financial Daily reported last Friday that certain analysts expected the long-term value of Tanjong to far exceed RM21.80, even by about 50%, due to the company’s five-year aim to double its power capacity from 4,000MW to 8,000MW.

If successful, the move could effectively almost double its earnings and share price over the longer term.

So, if shareholders choose not to accept the offer, what is the possibility of the privatisation materialising this time?
The offer is conditional upon Tanjong Capital Sdn Bhd (TCSB) obtaining not less than 90% of the offer shares, their voting rights and the relevant approvals.

TCSB is a private investment vehicle consisting of 11 investors acting in concert. The man behind the scenes is effectively tycoon T Ananda Krishnan, who through Usaha Tegas Sdn Bhd and Usaha Tegas Resources Sdn Bhd, holds a 65.8% interest in TCSB.

Other major investors in TCSB include Ultimate Corporation Sdn Bhd, Marlestone Investments Ltd and Macroniaga Sdn Bhd. Investors in TCSB collectively hold a 46.96% interest in Tanjong, making up a significant portion of the 90% required to pull the privatisation through.

Hence, only a further 43% of approvals are required in order to fulfil the 90% acceptance condition.

Based on the 2010 annual report, Capital Group International Inc and Capital Research and Management Company are expected to play a pivotal role in this respect as they hold 6.09% and 4.95% of Tanjong, respectively.

These two firms are part of US-based Capital Group, which is one of the world’s largest fund and asset management companies.

The chief shareholders of Tanjong (including investors in TCSB) are mainly via nominees and companies, which hold 57.4% and 36.58% of Tanjong, respectively.

By comparison, individual investor participation is small, with just a 4.42% holding vested in 6,929 individuals. Thus, this group is not likely to make the deciding vote.

Generally, industry observers expect a fairly straightforward process, with some minor resistance to the offer price. However, given that the anticipated close of the offer is still two months down the road, it remains to be seen how this could pan out for shareholders.

A better offer from Ananda is highly unlikely, and the offer appears reasonable in the current scenario. Still, it will be interesting to see if some investors decide not to opt for the offer, hoping to keep the company listed for better long-term returns.

This article appeared in The Edge Financial Daily, August 3, 2010.