HTL was founded by the Phua brothers in 1976, initially making PVC sofas for the Singapore market. Photo: CompanySHANGHAI-LISTED Yihua Timber has agreed to purchase HTL International in cash for $1 a share, valuing the Singapore-listed company at around S$400 m.

The share price of HTL recently traded at 72 cents, which is a potential 39% upside to the offer price. 

However, skepticism and uncertainty about the privatisation deal prevail among some investors, as can be seen in the forum discussion at Valuebuddies.com 

We asked a long-time shareholder of HTL to give his take on some key questions: 


Q: On HTL's road to being privatised, what do you reckon are the most important milestones achieved so far?

A: It would be Yihua's shareholders' approval of the deal. This was obtained in a shareholders' meeting on 14 March 2016 in Swatow. Yihua's controlling shareholder had approximately 25% of the shares on paper and there was uncertainty (for outsiders like me) as to whether the approval from shareholders could be obtained.

As disclosed by Yihua on the Shanghai Stock Exchange, investors holding shares representing 27.7% of outstanding shares of Yihua attended the meeting.  99.9% of the shareholding were in favour of the deal and 0.01% against.


Q: What pre-conditions remain to be fulfilled?

A: They are:
(i) the Proposed Acquisition being sanctioned by National Development and Reform Commission of Guangdong Province;
(ii) the Proposed Acquisition being approved by Shantou Administration of Foreign Exchange; and
(iii) the Proposed Acquisition being approved by Department of Commerce of Guangdong Province.


Q: How challenging is it to have these conditions fulfilled?

A: This is the part that I do not have any competent practical knowledge in. But logically this should not be a problem.

Chinese companies are following the central government's strategic call to “走出去” by making overseas acquisitions. According to published statistics, in 2014, Chinese companies made direct investments totalling USD100billion in 6,128 overseas companies in 156 countries.

Why should Yihua's acquisition of HTL amounting to S$400m in a non-strategic industry (furniture manufacturing) be disallowed by the Chinese authorities? 

Q: Having come so far, what are the chances of this being derailed?

A: Yihua will make a formal offer to HTL shareholders only after the above regulatory approvals are obtained. Assuming that is done, HTL's shareholders will have to approve the scheme of arrangement.

The scheme must be approved by a majority in number representing 75% in value of the shareholders, present and voting either in person or by proxy, at the meeting convened to approve the scheme.

According to HTL's 2014 annual report, the two largest shareholders are the 3 Phua brothers (plus concerted parties) with a combined shareholding of 50.47%.

The next largest shareholder is a Fidelity fund at 9.85%. 
Will Fidelity oppose the deal and can it garner enough votes to represent 25%?

Q: There are profit guarantees for HTL's performance for the next three years.

BEM Holdings (a vehicle of HTL's controlling shareholders) agreed to compensate and pay to Yihua Timber:
1. Amt equivalent to the shortfall if FY16 PAT is < US$25m
2. Amt equivalent to the shortfall if FY17 PAT is < US$27.5m
3. Amt equivalent to the shortfall if FY18 PAT is < US$30.25m

Total profit guaranteed fr FY16 to FY18 = US$82.75m (or S$116m).

According to a forumer, "Unless we can assume BEM is doing charity and shouldering this profit guarantee alone, I would imagine that minorities are on the hook. If HTL only breaks even for the next 3 FY's, shareholders will be looking at an offer that's equivalent to $416.6m - $116m = S$300.6m, or 72 cents/share (not too far away from the last done price)."

What are your comments?

A: As announced on SGX website, the profit guarantee is provided by BEM Holdings and not HTL international. The shareholders of BEM are the 3 Phua brothers.

For reasons that minority shareholders are not aware of, BEM and the 3 Phua brothers have taken upon themselves to issue the profit guarantee. Minority shareholders are not on the hook for any shortfall.

Q: The same forumer said: "Seems to me that Yihua has purposely inflated the acquisition price & PAT targets, so that they can transfer out a big sum of money, and then get it back later. I'll leave it to your imagination as to why they are doing so." What are your comments?

A: The reasonableness of the profit guarantee is disclosed in detail and supported by numbers in Yihua's announcement in response to Shanghai Stock Exchange queries. (So the regulators in China are not unaware of the capital flight risk that these forumers are suggesting.)

On pages 108-110 of 宜华木业重大资产购买报告书 (report on major acquisition), Yihua said if the following factors -- 1. the decrease in Brazilian wet blue hide prices; 2. the weakening of the RMB against USD; and 3. cost savings from restructuring after privatization -- were applied retrospectively to HTL's 2013, 2014 and 9 months 2015 results, HTL would have been able to achieve net profit of USD18.28m, USD36.08m and USD23.01m, respectively.

That works out to a yearly average net profit of the past 2.75 years of USD28.1m. Assuming no changes in conditions, the profit guarantees of USD25m, USD27.5m and USD30.25m are deemed reasonable. (This opinion was obtained from independent accountants.)  

Various other announcements by Yihua (600978) can be obtained from this link. Check out this link too.

Q: Yihua Timber has agreed to purchase all HTL shares in cash by way of a scheme of arrangement. What's the significance of this method compared to a general offer?

As opposed to a general offer where 90% acceptance needs to be achieve to delist the company, the requirements for scheme of arrangement approval are lower. 

The scheme must be approved by a majority in number representing 75% in value of the shareholders, present and voting either in person or by proxy, at the meeting convened to approve the scheme.

It's all or nothing for the acquirer.


Comments  

0 #2 SHL 2016-03-22 19:16
BEM Holdings has agreed that the first profit guarantee period start from 1 Aug 2016 and thus it could be inferred that the expectation is for everything to be completed by 31 July 2016.
Quote
0 #1 ysc02 2016-03-21 08:08
Hi Nextinsight;
When HTL Pte due date ? NOL has six mths time frame....
Quote

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