Good Deals, Bad Deals, Win-Win Deals

The way a company handle acquisition and disposal of assets tells us a lot about management's savvy and the way they would handle corporate strategy.



London Biscuits / Lay Hong / QL

I like QL and London Biscuits, but following the deal, I would have to take London Biscuits off the list. I liked their expansion plans, but obviously London Biscuits had no inkling of how to leverage, improve, rebrand, strategise their acquisitions. I doubt there was any positive value add management input from London Biscuits. Since they acquired Lay Hong, which was a good deal relative to Lay Hong's NTA, nothing has changed, Lay Hong was still barely profitable but trades at a 50% discount to NTA. Its share price did not budge much from the time London Biscuits bought them a few years back. Why buy in the first place??? Yes, bought at a good price, so what, you loaded debt to do it, unless you think you can increase value in Lay Hong, or the earnings from Lay Hong would more than cover your interest cost, why buy?

Now, Lay Hong is a lot better than TPC, why two egg companies? Both also not profitable and you sell the more attractive one. How do shareholders of London Biscuits view your selling of Lay Hong, and then to see Lay Hong's share price double literally in a matter of days??? What does that tell you???

That was a good deal by QL but a very bad deal for London Biscuits. Was it to pay down debts? Your debt level was just as high a year ago, and almost the same as when you loaded debt to buy Lay Hong, what gives?

I don't think its necessary to bring down debts by selling Lay Hong. They have been poorly advised. If you know there is deep value in Lay Hong, you should be selling close to NTA. If the buyer is not willing, then take QL shares, not cash. At least you can ride the unlocking of value in Lay Hong. Now London Biscuits look very silly indeed. If anyone asks London Biscuits about the Lay Hong deal now, they can only shrug their shoulders. Sigh...

Cocoland / F&N

Win-win deal. Fun is over when investors realise that F&N bought their stake at such a deep discount. Couldn't fault Cocoland as the deal would secure a big customer and a platform to emlarge earnings. This shows Cocoland management having the vision to forgo a bit to gain a lot. Look at where their share price is now.

3A / Wilmar

Win-win deal. Same as above. If I was 3A, I would have done the deal at 50 sen even, because the platform would be so enlarged and the prospects improving by multiples with just Wilmar inside.

MFCB / Jadi

It may not make sense to many but I think MFCB is on a winner and will be able to leverage and extract more value by having Jadi into its stable. Win-win deal.

Management needs to know when to do deals and using the right way. It can be cash, convertible notes, shares issuance, even a put and call deal ~ each option is important in its own way depending on how things would flesh out following the deal. An asset may be multiplied in a different company's ownership. There has to be consideration of "opening of doors", "whether you can take the asset to the next level", etc...

In the same note, advisers and bankers should be able to advise these deals better and not just do the deals for deal making sake, just to earn some fees.

3A Resources, Distinctions All The Way With Their 20% Placement

You can't hit all the balls pitched to you, I guess. A good friend asked me to look up 3A two weeks back. I said, I don't even know what they did. I did looked it up, its principal activities were manufacturing and selling of food and beverage ingredients. That didn't look too exciting, although I did note that it was a growth based company, having been moved to the Main Board from Mesdaq.

But without further information, the stock was looking quite expensive at 80 sen. Now that the news is out, you wished you had some at 80 sen. Gawd, they placed out 20% new shares to Wilmar International. What a platform!!! I think that is like placing shares to Warren Buffett, seriously. Wilmar has done so well in palm oil, and has made waves moving to China with an upcoming listing in HK. Their China vehicle will focus on food, water and related industries. It will take a huge person to bet against Wilmar. But, you cannot hit all balls pitched to you, particularly when you have no idea what was happening. Good job on those who managed to buy early.

3A Resources Berhad was incorporated in1977 as a family business producing soy sauce. In 1989, the family business was incorporated into San Soon Seng Food Industries. 3A listed on the on MESDAQ on 13/8/2002 and subsequently moved the Main Board of the Bursa Malaysia on 18/6/2008.
3A is one of the leading ingredients manufacturers in the food and beverages industry. All the products manufactured by the subsidiary have been certified as HALAL by the Islamic Development Department of Malaysia. It is also ISO9001 certified by the Standard Industrial Research Institute Malaysia for its quality management system.

Aside from its main products, the company also has two additional products, namely caramel powder and hydrolyzed vegetable protein powder. Currently, the group exports approximately 30% of its group sales to 25 countries. Three A's latest product is glucose-based powder, maltodextrin, which is used in infant milk powder and 3-in-1 instant beverage. This product was previously imported from the US, Thailand, China and Europe. Its customers include multinational corporations in Malaysia such as an American supplier of chili sauces to food chains in Malaysia and Hong Kong based Lee Kum Kee group which produces oyster sauces.

The new glucose plant is already running at about 40-50% capacity, since its
completion in 4Q08. Aside from additional external sales, the availability of
glucose means the company is now running its maltodextrin plant at almost
full capacity. Previously, limited feedstock had kept production at just about
half of its 1,200 tonne per month capacity.

3A has made very good inroads into this relatively new market. Its
maltodextrin plant is the only one in Malaysia and has been operational since
mid-2007. Maltodextrin is a white powder with little sweetness, has a bland
taste and is widely used as fillers or bulking agent.

In particular, the company has been quite successful in tapping into the 3-in-
1 dry beverage mixes market segment. Prior to 3A’s entry into the market, all
of the maltodextrin consumed locally is imported. The company’s proximity to
end-user companies gives it a strong home ground advantage. Its
maltodextrin is also competitively priced against those imported from the US
and Europe.

Aside from 3-in-1 mixes, 3A is also eyeing other segments of the
maltodextrin market, such as the infant milk powder industry. Following
positive feedback from end-users, both local and in the region, the company
is now planning to set up another maltodextrin plant capable of producing up
to 2,000 tonne per month.

If all goes to plan, the new plant will be operational by 4Q2010 – and will
underpin growth in 2011-2012. As a stopgap measure, 3A intends to upgrade
its existing maltodextrin plant, which would boost output up to 1,500 tonnes
per month, to cater to rising demand.

Additional feedstock requirement for the new maltodextrin plant was already
taken into account when 3A was building its glucose plant last year. The
glucose plant, with current capacity of 7,000 tonne per month can easily be
upgraded to produce up to 12,000 tonne per month with the incurrence of
just a small additional capex.

The Proposed Private Placement will entail the issuance of up to 20% of the issued and paid-up share capital of 3A. Based on the issued and paid-up share capital of 3A as at 30 September 2009 of RM61,600,003 comprising 308,000,019 ordinary shares of RM0.20 each ("3A Shares"), a total of up to 61,600,003 3A Shares ("Placement Shares") may be issued pursuant to the Proposed Private Placement.The Placement Shares are proposed to be placed out at an indicative issue price of RM0.75 per Placement Share. The issue price of RM0.75, represents a discount of approximately 12.63% to the five (5)-day WAMP up to 02 October 2009 of RM0.8584.The Placement Shares are proposed to be placed out to strategic third party investors, namely Wilmar International Limited ("Wilmar" or “Investor”). Wilmar has given a letter stating that it is interested to subscribe for 61,600,000 Placement Shares at RM0.75 per Placement Share. Upon the completion of the Proposed Private Placement, Wilmar will emerge as new substantial shareholder of the Company with equity shareholdings of 16.67%. The Proposed Private Placement is to enable 3A and Wilmar to collectively venture into any future overseas investments.

p/s photos: Lee Ji Ah