When is a good time to buy into the Sunway merger?

Share prices of Sunway Holdings Bhd and Sunway City Bhd (SunCity) have been falling in the market recently, raising the question of whether investors are feeling jittery about the impending merger between the two companies.

Sunway Holdings and SunCity closed at RM2.14 and RM4.20, respectively, yesterday. Interestingly, both counters were trading at a 17.6% discount to their respective offer prices of RM2.60 and RM5.10 under the offer by Sunway Sdn Bhd (SSB).

To recap, in November last year, SSB proposed to take over the assets and liabilities of Sunway and SunCity in a deal involving cash and share swaps for RM4.5 billion.

Under the deal, SSB proposed to take over SunCity at RM5.10 a share and Sunway Holdings for RM2.60 a share. In addition to that, SSB also offered to buy Sunway Holdings and SunCity warrants at RM1.50 and RM1.29, respectively.

The proposed deal will be done via the issuance of new shares in SSB valued at RM2.80. Eighty percent of the offer will be settled by the new shares and the balance in cash. In addition to that, SSB will also issue new warrants for all Sunway Holdings and SunCity shareholders on the basis of one SSB warrant for every five shares.

When the proposal was announced on Nov 24, Sunway Holdings and SunCity climbed 3% to their peaks of RM2.41 and RM4.74, respectively. However, the counters have since come under some selling pressure.

It does not help that the proposed merger of IJM Land Bhd and Malaysian Resources Corp Bhd (MRCB), which was announced around the same time, was aborted.

Does the recent selling pressure reflect the market’s skepticism about the merger?

According to analysts, the deal is most likely to go through as both companies share the same substantial shareholders and there is no question of differing values or work culture.

Analysts in general have been positive on the proposed merger, citing improved liquidity, a stronger balance sheet and synergistic values.

“As opposed to the recent fall-out of the IJM Land-MRCB merger, there is no question of differing work cultures or missions.  In fact, the merger of the two companies will result in a bigger and better capitalised entity with a potential market capitalisation of over RM3.5 billion,” says an analyst.

In addition, operations and profit margins could improve, as well as bringing about cost savings.

“The [merged entity’s] stronger balance sheet would also allow it to undertake bigger projects in the future,” he says.

According to AmResearch, the offer is a good opportunity for investors to move to a larger and more liquid company.

“Its net asset value and earnings growth would be supported by a combined landbank of 2,600 acres, including in Malaysia, Singapore, China, India and Sri Lanka, with total gross domestic value of RM25 billion. Based on our estimates, the larger entity would potentially have a market capitalisation of RM3.5 billion with combined revenue of RM3.5 billion and earnings of RM320 million,” the research house says.

If that is the case, when is it the right time, or the right price, for investors to buy the stocks?

It is worth noting that the respective offer prices might not be the “right” price for the stocks, or an indication of their fair values or where they should be trading at.

This is because the values they are swapping into are “relative values” into a new entity.

This is unlike a general offer exercise where a fixed price is determined by the acquirer, and is backed by a cash or share offer that can be quantified.

As such, the “relative” values and the ultimate valuation of the merged company matter most, rather than arbitrarily determined “offer prices”.

After all, SSB could have set even higher offer prices in the exercise, but there is no guarantee that it will move to those levels.

Ultimately, the valuation of the merged entity is of paramount importance to investors. But is the merged unit worth over RM3.5 billion in market capitalisation?

Some analysts think it may be too early for investors to establish a fair value for the merged company. An analyst says the new structure may not be just the sum of the two companies.

The EGM to vote on the proposed merger is only expected to be held in April or May. A 50%-plus-one share of the minorities would have to vote in favour of the merger for the deal to go though. When that happens, both Sunway Holdings and SunCity will be delisted, and the newly merged entity will need to seek a new listing on Bursa Malaysia, which is subject to approval.

According to market talk, the listing is only expected to happen in July or August. Until then, there is no certain way to determine what assets and liabilities will be assumed under the new entity.

As such, the best way for investors to enter into the merged company at the moment is to look at the discount on the two stocks relative to their offer prices for any possible arbitrage opportunity.

As it stands now, both counters’ 17.6% discount to their respective offer prices means the market has been quite efficient and there is no arbitrage opportunity between the two stocks.

Investors should monitor the relative discounts on the two stocks against their offer prices.

This could indicate possible arbitrage opportunities between the two stocks, as well as the cheaper entry into the merged Sunway group.  - by Max Koh, theedgemalaysia.com