Failed deal a blessing in disguise?
The falling through of the proposed merger between Malaysian Resources Corp Bhd (MRCB) and IJM Land Bhd could be a blessing in disguise for the former.
“For the shareholders of MRCB, a merger at a later date could mean a better deal. This is presuming MRCB’s valuation could be further enhanced once its role in the Rubber Research Institute of Malaysia (RRIM) land is firmed up,” said a market observer.
After falling at the start of the day, MRCB’s shares ended yesterday’s trade one sen higher to RM2 with a volume of 8.67 million. However, IJM Land’s share price continued to fall, closing nine sen lower to RM2.77 with 10.59 million shares done.
At yesterday’s closing prices, both MRCB and IJM Land’s shares have surrendered their gains driven by the proposed merger that was first announced on Nov 23. In fact, both have yesterday closed below their prices on Nov 22 of RM2.15 and RM3.08, respectively.
Nonetheless, it was IJM Land’s shareholders that had suffered the heavier blow. Note that MRCB’s share price had only fallen 6.1% from its high of RM2.13 on Dec 10 while IJM Land had lost 14.5% from its high of RM3.24 on Dec 29.
Despite the termination of merger talks at this stage, most analysts are still upbeat on the prospects of both MRCB and IJM land, saying the knee-jerk reaction to their falling share prices could present a good opportunity to acquire shares.
In fact, the aborted plans may work out to be a blessing in disguise in favour of MRCB, they said.
MRCB is widely regarded as the front runner in securing the lead developer role, if not a major participation, in the development of the 3,300-acre RRIM land in Sungai Buloh. This is by virtue of the fact that the Employees Provident Fund (EPF) — which has been granted the mandate to develop the RRIM land — is MRCB’s controlling shareholder with a 41.63% equity interest.
“For the EPF to maximise its returns from the RRIM land, MRCB in which the retirement fund holds a significant interest has to play a major role,” said an analyst.
“If the merger talks were to be reignited after it is being firmed up that MRCB would have a major role in the RRIM land, the latter’s shareholders — which include the EPF — would benefit from a higher swap ratio against IJM Land shares,” he added.
The analyst said the “RRIM land factor” was not “well reflected” in the indicative price of RM2.30 per MRCB share in the merger with IJM Land. IJM Land was valued at RM3.65 per share in the aborted exercise.
It was previously reported that at least one research house, namely OSK Research, had not viewed the indicative price of RM2.30 as being fair to MRCB’s shareholders as it offered limited upside to MRCB’s share price prior to the suspension on Nov 23 of RM2.15.
While details on why the deal fell through remain sketchy at this juncture, CIMB Research said it believes a contributing factor was the pricing for MRCB’s concession assets.
“(They) were to be rationalised and absorbed by IJM Corp Bhd (IJM Land’s parent) and would make up the potential cash payout on top of the swap price of RM2.30 for MRCB. The reference price for IJM Land was set at RM3.65,” it said. “The termination of the merger deal is less negative for MRCB given its lower valuation for the swap price.”
Like many others, CIMB Research saw the potential upside in the proposed merger, which would have created the country’s second-largest property company with a market capitalisation of about RM7 billion as well as enhanced liquidity and credibility.
“We also noted the good fit between the two companies. MRCB would bring to the table its links to EPF, status as a GLC, exposure to government projects under the Economic Transformation Programme (ETP), expertise in transport infrastructure and likelihood of participation in both infrastructure/development of the Sungai Buloh land,” it said. “Meanwhile, IJM Land would offer its wealth of expertise in both commercial and residential development.”
However, it noted that MRCB was still poised to do well on its own. Likewise, Credit Suisse in a research note on Dec 30, 2010 said it felt IJM Land was fundamentally sound and had the sufficient strengths to perform well by itself.
Credit Suisse said its view on IJM Land remained unchanged as it had not factored in the effects of the MRCB merger into its target price of RM3.20. “We remain positive on IJM Land as it remains out preferred proxy for the booming Malaysian property sector,” it said.
Credit Suisse also said it did not view the aborted merger as being a major disappointment as it said the possible benefits of the merger to IJM Land were not as apparent as some of the immediate risks such as the possible dilution of earnings as well as integration challenges.
It added that when MRCB and IJM Land announced the possible merger, there were some issues Credit Suisse felt were unresolved, namely the pricing of MRCB’s non-property assets to be transferred to IJM Land and the management of other operating entities, which they felt could have led to the demise of the deal eventually.
However, ECM Libra Research was disappointed with the breakdown of merger talks at this juncture, saying IJM Land was close to securing a bigger part in the development of the Sungai Buloh project, potentially through MRCB.
AmResearch also expressed some disappointment at the termination of talks, saying it was a “missed opportunity” for MRCB to merge with a capable developer, although it expected this would not be the end to possible future partnerships between the two entities.
“With MRCB and IJM Land both having the EPF as a common major shareholder, it is inevitable that both will enter into future partnerships or contemplating another merger again. Whether the next merger would be more favourable to MRCB or IJM Land would naturally depend on where EPF has the higher stake,” said an analyst. - by Melody Song, theedgemalaysia.com.
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