AWC Berhad has proposed acquisition of Trackwork & Supplies Sdn Bhd subject to ordinary resolution in EGM held on 25th September 2018. The purpose of this post is to analyze the impact on the financial health of AWC upon the acquisition.

AWC is going to acquire 60% of Trackworks for a total consideration of RM 43,500,000.

a.RM 23,500,000 will be funded through equity

b.RM 20,000,000 are funded by cash.

It should be noted that these huge sums of consideration are not paid in full at once, they are seperated into different tranches to paid to the seller of Trackwork due to profit guarantee and indemnity reasons. 

*Options are in place should AWC decide to acquire the remaining 40% stakes in Trackwork, but this wouldn't affect our 60% acquisition so let's just ignore that for now.*

Some key financial measures of AWC prior to the acquisition:

Trackwork has agreed to the profit guarantee of RM20,000,000 with AWC. RM 8,000,000 of net profit will be delivered in the FY2018, while RM 12,000,000 will be delivered in the FY2019.

Through this profit guarantee, we can see that the cash consideration by AWC of RM 20,000,000 has been offsetted by this profit guarantee, which means the acquisition is only done through the issuance of shares by AWC.

 20,000,000 of AWC shares are issued at RM 1.00 / share which is at a premium of 21.9% as of today's closing price.

The reason for AWC to do this is to ensure the existing shareholder's equity are not diluted. 

2. Assuming that the acquisition goes through, what will happen?

Before taking into consideration of the value of Trackworks, we will see the following happen. 

Shares outstanding = 289.6mil

Which equates to an additional 7.4% shares or 20mil shares outstanding issued by AWC. Technically, the EPS and BPS of exisiting shareholders will dilute by 7.4% but that shouldn't be the case before accounting for the value of Trackworks. So let's continue...

3. Value of Trackworks

Based on the financial report (FY2017) supplied by Trackworks in the AWC circulars to shareholders on proposed acquisition: 

Trackworks is worth 

4. Combination Effect

Firstly, we can be assured that a 60% stake will give AWC 11.57 mil of Net Tangible Asset, we can also safely assume that the acquisition will increase AWC Berhad's net profit FY2018 by 8,000,000 due to the profit guarantee. From then on we can calculate the net effect of this acquisition.

From here we can see that NTA / share for existing shareholder and Book Value / share both have been diluted due to this acquisition, which at first doesn't look like good. BUT we have not accounted the 12,000,000 profit guarantee due in FY2019 by Trackworks which might explain this shortfall. 

5. So?

This acquisition might be beneficial for the AWC in the long term. However, the moment the SSA is signed, the shareholders will experience slight dilution of their share equity before being restored or increased in FY2019. Furthermore, this analysis does not account for the increased profit generated by Trackworks and also the synergy effect created. 

*Disclaimer: This analysis does not constitute as financial advice and is not intended to be used as the basis for making an investment decision