A NEW trend is taking place in Bursa Malaysia. New life is being injected into listless companies by new shareholders looking for a quick way to obtain a listing status to house their businesses.

The companies targeted are those that have illiquid trading, a tiny market capitalisation, unexciting earnings and relatively clean balance sheets.

Outright takeovers by new shareholders and reverse takeovers (RTOs) are routes that are becoming increasingly popular versus going down the conventional initial public offering (IPO) circuit.

Equity capital market folk say that the demand for “existing listed companies” are on the rise, and with that, they predict more takeover exercises will be taking place over the next few months.

 

Reasons behind RTOs

If one were to take the customary IPO route, firstly the exercise is timely and can easily take more than a year to complete. The company’s owner is also overwhelmed with strict compliance issues revolving various submissions and many meetings with the regulator.

As the Securities Commission tightens its measures for companies to qualify for a listing status both through IPO and special purpose acquisition companies (SPAC), the takeover route will be gaining more prominence.

 

“Right now when my client tells me he wants a listing status, I will first suggest buying over an existing listed company. The normal IPO route is too time consuming and tedious,” said one corporate advisor.

“Looking at the current pace of approvals for IPOs, I think the trend for takeovers and RTOs will continue,” says HwangDBS equity capital market head Sherilyn Foong.

So far this year, only 3 IPOs have taken place, namely IOI Properties Group Bhd, SCH Group Bhdand MyETF MSCI Malaysia Islamic Dividend.

A check on Bursa Malaysia reveals that there are a goldmine of companies which could potentially be takeover targets. There are some 40 companies with a market capitalisation of less than RM20mil and some 198 companies with a market capitalisation of less than RM50mil.

Some of the companies that are supposedly up for “sale” for the right price includeMTD ACPI Engineering Bhd, PDZ Holding Bhd, GPA Holdings Bhd, Astral Supreme Bhd and Bertam Alliance Bhd.

“Many owners with dead-end businesses are open to selling their companies. It is really just a matter of pricing,” says a broker.

In the case of a company takeover by a new shareholder, while it is in accordance with the Takeover Code, the compliance issues are a lot less and the entire process can be completed in six months.

All the new owner needs to do is strike up an agreement with the existing owner to buy up a controlling stake in the listed company.

Subsequently the new owner will need to launch a mandatory general offer and eventually inject his assets into the listed company. However the main problem of having a listed entity is already solved.

The new owner already owns liquid securities of a listed company and now has the flexibility of raising funds from the capital market.

 

Of course, how well the company does also depends on the personality behind the company.

Look at the difference in interest garnered between the new shareholders that came into Focal Aims Holdings Bhd and Damansara Realty Bhd.

On Feb 18, Seaview Holdings Sdn Bhd made an offer to acquire a 51% stake in Johor Corp’s Damansara Realty for RM78.9mil or 50 sen per share.

The share price has shot up from the 60 sen level to RM1.13 currently. However the reception it received is vastly different from the fervour generated by Eco World Development Bhd with its “blue chip” former S P Setia leadership.

Since Eco World first made its offer to take over Focal Aims last October, its share price has appreciated 239% to RM4.74. This is way above the takeover price of RM1.40,

Foong says there is a view that takeovers and RTOs are quicker apart from entailing a higher degree of success due to a stronger commitment from the corporate owners and all stakeholders involved.

“Depending on how the exercise is structured, it may even seem less onerous and definitely more timely, versus a listing exercise that could take years to manifest,” says Foong.

“From an equity capital market’s point of view, a takeover is exciting because it enables an immediate market opportunity to ride on a bull market wave, as seen in the case of Eco World taking over Focal Aims’ listing status. Whereas the timing of an IPO debut may not be so predictable,” she says.

Astramina Advisory managing director Wong Muh Rong says the capital markets are only a platform for owners to raise funds to meet their business expansion needs.

“Whether it is an IPO, RTO or takeover, these are just ways and means to achieve the ultimate objective which is profiling, fund-raising and image-building,” she says.

“It is all about what they want and timing to the market. Ultimately as a successful listed company, can they successfully raise funds from the capital market? Procedural wise, so long as it is in compliance of existing rules and regulations, all options should be considered and deliberated,” she says.

Wong feels that the key difference between embarking on either an IPO, RTO or takeover is mainly in the timing and market opportunities.

In the case of an IPO, all regulatory processes need to be obtained upfront before a prospectus is printed to raise funding from the market.

In the case of an RTO, the timing to market with the intention to raise funds starts at the point of its announcement to Bursa.

In the case of the takeover route, the timing to market runs parallel with the approvals from the authorities. These approvals encompasses the submission of offer documents and the appointment of independent advisors.

“All three methods are strictly based on listing requirements and the takeover code timelines. I cannot say one is better than the other. It is what the entrepreneur wants to achieve in terms of timing and market opportunities. Eventually the success of any company is still dependent on the personality or entrepreneur who runs the company,” says Wong.

Wong says that RTOs and takeover routes are two different directions altogether.

In the case of an RTO, the new white knights seek exemptions to undertake a mandatory general offer due to a change in control. However in the case of the takeover route, the new owners who take control of a listed company undertakes a mandatory general offer in the form of cash to announce to the whole market his intention to gain control of the listed company and offer to buy up shares of the minority shareholders.

“Specifically, they express their intention to retain the listing status of the company. Post MGO, the new owners build their own business or grow the existing business,” she says.

The two approaches will result in different outcomes.

“The RTO method seeks shareholders for exemptions of an MGO (despite a change in control), while the other actually offers a cash exit to minority interests to buy up a further stake in the company to gain further control and being clear upfront that the new owners want to retain the listing status,” says Wong.