"YTL Cement minorities stuck between a rock and a hard place", written by Max Koh, 2 February 2012

It would appear that YTL Cement Bhd’s minority shareholders are stuck between a rock and a hard place when it comes to accepting YTL Corp Bhd’s offer to take the former private.

Last December, the conglomerate made a conditional share exchange offer to buy the remaining shares and outstanding irredeemable convertible unsecured loan stocks (ICULS) in YTL Cement that it does not own at RM4.50 and RM2.21 respectively.

The share exchange would be settled with the issuance of YTL Corp shares of 10 sen each at RM1.42 per share. This translates into an exchange ratio of 3.17 YTL Corp shares for every YTL Cement share, and 1.56 YTL Corp shares for every YTL Cement ICULS.

The offer, which will be closed on Feb 10, 2012, raised eyebrows as YTL Corp received a waiver from Bursa Malaysia to hold an extraordinary general meeting (EGM) to obtain YTL Corp shareholders’ approval for the share swap.

YTL Corp based this waiver on the grounds that it has obtained authorisation from its shareholders at its annual general meeting (AGM) last November to issue up to 10% of its current issued shares without the need for shareholders’ approval. YTL Cement was also not required to hold an EGM.

As such, the deal would go through without an EGM at YTL Corp and YTL Cement.

Hwang DBS Investment head of equities Gan Eng Peng said YTL Corp had provided a poor share swap for the minority shareholders of YTL Cement, adding that the minorities could not object to the offer as no EGM would be held, and the offer does not include a premium.

“Furthermore, YTL Corp’s high effective shareholding means it is very easy to delist YTL Cement, forcing the minorities to accept the poor deal,” Gan told The Edge Financial Daily.

YTL Corp already owned 47.4% of YTL Cement on Jan 9, 2012, the posting date of the offer document . As at Jan 20, it received acceptances for an additional 9.62% stake in YTL Cement which nudged up its interests to 57.02%, hence making the offer unconditional. Feb 10 will be the first closing date for the offer.

Gan said the share swap is essentially a case of Hobson’s Choice for YTL Cement’s minorities who have little to benefit from the share swap, whether they accept or reject the offer.

Gan noted that if the minorities accept the offer, they would be trading for less attractive YTL Corp shares which are more expensive and provide less dividend payout.

For FY11 ended June 30, YTL Corp and YTL Cement declared two sen and 13 sen in dividends to their shareholders respectively. The dividends represent a yield of 1.4% for YTL Corp shares at RM1.42 each, and 2.9% yield for YTL Cement shares based on the offer price of RM4.50 each.

Gan also noted that the minorities would be switching their investment to a conglomerate, which is less favourable than a pure-play stock.

The latest statements ended Sept 30, 2011 showed that YTL Cement was in a net cash position, while YTL Corp had RM28.34 billion in borrowings and RM12.97 billion in cash.

As at Sept 30, 2011, YTL Corp’s and YTL Cement’s net assets per share were RM1.20 and RM4.76 respectively, for FY11, YTL Corp posted a net profit of RM1.03 billion or 11.53 sen per share (basic) and 11.44 sen (fully diluted). YTL Cement, meanwhile, recorded RM337 million in net profit, with earnings per share of 71.53 sen (basic) and 48.44 sen (fully diluted).

At the offer price of RM4.50, YTL Cement is being valued at 0.95 times book, while the shares it will receive in YTL Corp are priced at 1.18 times book.

On a price-earnings ratio (PER) basis, YTL Cement is priced at a historical PER of 6.3 times, while the YTL Corp shares are issued at a PER of 12.3 times — almost twice that of YTL Cement shares.

On a fully diluted basis though, the PER valuation gap narrows, with YTL Cement valued at 9.3 times and YTL Corp at 12.4 times.

If the minorities were to refuse the offer, Gan said they would end up with YTL Cement shares that are less liquid as other parties would have accepted the share swap.

Note that YTL Corp already owned a 57.02% stake as at Jan 20.

In its announcement to Bursa Malaysia, YTL Corp said it does not intend to maintain the listing of YTL Cement if it does not meet the public shareholding spread of 25%.

YTL Corp and parties acting in concert (PAC) currently have a 96% stake in the ICULS. If the ICULS are fully converted, YTL Corp and PAC would own 67% of YTL Cement’s enlarged share capital.

“It would be easy for YTL Corp to increase its shareholding from 67% to 75% and force a delisting. In an EGM called for delisting, all shareholders, including PAC, can vote and there should be an exit offer of the same nature”, said Gan.

In addition, a minimum 90% acceptance level of the outstanding shares would result in a mandatory acquisition by YTL Corp of YTL Cement shares, including those that belong to the dissenting shareholders.

As such, Gan noted that the outcome is not favourable for YTL Cement’s minority shareholders, whether they accept the offer or not.

Compared with the recent privatisation offers for Proton Holdings Bhd and QSR Brands Bhd which offered a premium to the minorities, it appears that YTL Cement is left with no clear winning choice.

While the share swap is an easy deal for YTL Corp to privatise its subsidiary at a low price, observers are concerned that it would become a precedent for similar deals in the future.