On 20 March 2024, SCGM announced its intention to acquire a coconut company, Eramas Global Group Sdn Bhd (Eramas) through a Heads Of Agreement (HOA).

There are a few points to consider should you decide to invest in SCGM as an early bird before the official proposal is announced. I will explain each point in detail. 

1. The acquisition will be majority paid with shares fixed at RM0.615 per share.
   
2. This is a related party transaction.
3. The vendors will be exempted from mandatory offer.

The acquisition will be majority paid with shares fixed at RM0.615 per share.

• The Securities Commission (SC) generally do not allow reverse takeover to be carried out with asset injection to be paid 100% in CASH as vendors are regarded as CASHING OUT of their businesses. 
• The HOA fixed the new issuance of SCGM's share at RM0.615 per share despite no details on the consideration sum to be paid for the acquisition of Eramas. The Net Assets of SCGM as at 31st December 2023 was RM0.6142 and there is no premium for the listing status of SCGM. A clean company listed on the main board of KLSE can fetch around RM40 million for its listing status. The founder of SCGM, Dato Sri Lee Hock Seng (DSLHS), willingness to give up control of SCGM to the vendors at face value raises some eyebrows. Note that DSLHS and brothers did not sell their entire shareholdings to the Vendors. They retained close to 11% shareholdings in SCGM. This shows their confidence in the new coconut business as well as the leadership of the new controlling shareholders.
• The Vendors currently holds the largest controlling shareholdings in SCGM and thus there is no necessity for a HOA to safeguard mutual understandings between both transacting parties. In my opinion, the main purpose of this HOA is to fix the issuance price of the new SCGM shares to be issued as consideration shares. As SC requires justification for the issue price of the consideration shares when the proposal is submitted to SC for approval. Fully aware that the share price may move up when details of assets acquisition is leaked out while the proposal is being drawn up, it will then be difficult to justify fixing the issuance price of RM0.615 when the market price of SCGM is much higher.   
  

This is a related party transaction.

• As the Vendors holds 24.15% of SCGM currently, this is deemed a related party transaction and the vendors are not permitted to vote on the resolution pertaining to the proposal. 
  
• In view of the arm length nature of the underlying transaction, it will draw closer scrutiny from the SC to safeguard the interest of the minority shareholders of SCGM. Safeguarding measures includes consideration to be paid in shares, vendors disallowed to vote, ensure reasonable asset valuation, etc
• Excluding the vendors, the top 30 shareholders hold more than 33% shareholdings in SCGM. An unattractive deal is not expected to get past the EGM. 
  

The vendors will be exempted from mandatory offer

• It is likely that the issuance of new SCGM shares will result in the Vendors holding a majority stake in SCGM.
• The vendors are likely to be granted exemption to hold a majority stake of not more than 75% in SCGM.

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Conclusion

If DSLHS do not see potential in ERAMAS, why retained around 11% stake and let the company he founded into an ailing entity only to destroy the goodwill he established ? DSLHS could just distribute all cash in the company at RM0.6142 per share to himself and the shareholders and retire in peace. 

The is a related party transaction. The vendors cannot vote on the deal. The valuation of ERAMAS has to be attractive to pass the EGM. A cheap valuation for ERAMAS benefits the current shareholders of SCGM. 

Therefore, to strike a win-win deal, 

• the ERAMAS valuation has to be cheap to get approval from the SC and the EGM,
• the Vendors has to hold a very significant stake in SCGM to benefit themselves from the cheap valuation of ERAMAS, and 
• to fix the price of the new SCGM consideration share as low as possible to compensate the vendors for the cheap valuation of ERAMAS. The price cannot be lower than the Net assets per share of SCGM of RM0.6142.
  

Thank you

Just88

*** I do own the stock. This is not a buy call and decide at your own risk.