Anything Wrong With The ESSO Deal?

Background of Target Companies

Esso Malaysia Berhad (“Esso Malaysia”), a public listed subsidiary, together with ExxonMobil Malaysia Sdn Bhd (“ExxonMobile Malaysia”), operate the Esso and Mobil service stations in Peninsular Malaysia. Esso Malaysia also operates the Port Dickson Refinery.

In East Malaysia, ExxonMobil Borneo Sdn Bhd (“ExxonMobil Borneo”) operates service stations under the Esso brand. All three subsidiaries market lubricants, engine oils, other speciality products and cooking gas.

Backgroud of Buyers

San Miguel Corp has business activities in food, beverage, packaging and also venture into petroleum, power generation and distribution, mining and infrastructure.

Background of Sellers

Exxon Mobil Corp’s wholly owned subsidiary, Exxon Mobil International Holdings Inc (“EMIHI”) owns 65% of Esso Malaysia and 100% of ExxonMobil Borneo. Meanwhile, Exxon Mobil Corp’s wholly owned subsidiary, Mobile International Petroleum Corp (“MIPC”) owns 100% of ExxonMobil Malaysia.

What has happened?

Time: Between 1pm to 2pm on 17 Aug 2011

Reuters reported that San Miguel Corp. will buy 65 percent of Exxon Mobil Corp’s Malaysia downstream petroleum units for an undisclosed amount citing two people familiar with the matter.

When Esso Malaysia started trading at 2.30pm during the afternoon session, the market is excited with the piece of news and Esso Malaysia share price rose from RM4.33 to close at RM4.95 at the end of the day.

Time: After market close on 17 Aug 2011

The shocking surprise of Esso Malaysia Bhd announcement after market close revealed that the acquisition price is set at only RM3.50 which is merely 1.06x of last book value as at 30 Jun 2011 of RM3.28 per share.

The acquisition triggered MGO as expected and San Miguel Corp will also offer the pathetic RM3.50 a share to acquire all remaining 35% shares from the minority shareholders of Esso Malaysia Bhd.

Comment:        The earlier leaked news certainly fooled those who bought on the hope that a potential GO would fetch a good premium. 

Based on the afternoon transactions alone, a total of 2.54million shares were trades at average price of RM4.84 per share which gives total value of around RM12.3million.

From RM4.33 to RM4.84, SC should look very closely into ALL transactions for that day and also the 5 days prior to that for obvious reasons.

  

The announcement also attached a letter from Maybank Investment Bank signed by its Corporate Finance officers (Hidayah Hassan and Lin Shueh Fen) acting on behalf of San Miguel Corp.

It further revealed that San Miguel Corp has inked SPA with Exxon Mobil’s subsidiaries to acquire

a.             65% of Esso Malaysia Bhd at USD 206.02 million (RM614.25 million @ RM3.50/share)

b.            100% of ExxonMobile Malaysia

c.             100% of ExxonMobil Borneo

The latter two fetches a total price of USD 403.98 million (RM1,204.46 million).

Comment:        While one may try to justify that Esso Malaysia deserve a low Price-to-Book due to its sporadic earning record. Pegging it at merely 1.06x Price-to-Book (Mar 11 book value was RM3.28) is unjustifiable as it has started to perform much better than its closest peer, Shell Malaysia, that is now trading at 1.43x.

FYDec 2010	Esso Malaysia (a.)	ExxonMobil Malaysia (b.)	ExxonMobil Borneo (c.)	Aggregate Total  of (b.)+(c.)
Book Value	RM757.52mil	RM 224.50 mil	RM 14.23 mil	RM 238.73 mil
P/B	1.25x	N/a	N/a	5.05x
Revenue	RM 8427.45 mil	RM 3102.90 mil	RM 805.15 mil	RM 3908.05 mil
Net Profit	RM 268.58 mil	RM 52.96 mil	RM 0.77 mil	RM 53.73 mil
P/E	3.5x	N/a	N/a	22.4x

Aggregate valuation of the latter 2 companies shows P/E of 22.4x and P/B of 5.05x !!! While the deal values Esso Malaysia at only P/E of3.5x and P/B of 1.25x.

While we cannot begrudge anyone who is a willing seller, we should not care if the stakes are entirely 100% privately held, like ExxonMobil Malaysia and ExxonMobil Borneo. However, when it involves minority shareholders, we need to examine closer. It is one thing to sell out at lower than market price, it is another thing to pour cold water on your long suffering Esso Bhd shareholders. Many Esso shareholders tend to have a much longer holding period than the norm for obvious reasons - to be further dragged down by this deal is most disappointing.


To price the two private units at much higher valuations than the listed vehicle seems to be the key point of discontent. Although San Miguel paid RM3.50 per share for the Esso Malaysia, it has also acquired net debt of RM4.538 per share.  Therefore, effectively, the cost of acquiring Esso Malaysia by San Miguel is $8.038 per share. This is something which many minority shareholders have failed to grasp for the longest time. Even so, net-net, it is just buying at 1.06x book. Minority shareholders would probably have to hold on for a longer time now and hope that San Miguel does a better job.

p/s I do not have any positions in Esso.