Zecon warrant holders hit in privatisation deal

Zecon warrant holders hit in privatisation deal
Business & Markets 2013
Written by Afiq Isa of theedgemalaysia.com
Tuesday, 16 July 2013 09:46

KUALA LUMPUR: The major shareholders of ZECON BHD [] have proposed to privatise the company, offering 80 sen per share, but only five sen for the warrants.

The offer price values the shares at a premium of 17.6% compared to their closing price of 68 sen but at a steep discount of 77.8% to the warrants that closed at 22sen yesterday.

In a filing with Bursa Malaysia yesterday, Zecon said it had received a privatisation proposal from a group of majority shareholders led by Datuk Zainal Abidin Ahmad, who owns a direct and indirect 55.15% stake in the CONSTRUCTION [] outfit.

The proposal was made by Zainal Abidin and Dawla Capital Sdn Bhd as major shareholders, together with Tan Sri Amar Tommy Bugo and Zainurin Ahmad.

The group of shareholders collectively owns 59% of Zecon.

The proposed privatisation entails a selective capital reduction (SCR) and repayment exercise as well as an acceleration of the maturity of all outstanding Zecon warrants and their subsequent cancellation.

Based on a par value of RM1 per share, Zecon's current issued and paid-up share capital stands at RM119.1 million or a total of 119.1 million shares.

The reduction exercise will see the cancellation of 44.72 million shares, bringing down Zecon's issued and paid-up share capital to RM74.38 million.

From the cancelled portion, shareholders will receive a total capital repayment of RM35.78 million or 80 sen per Zecon share.

The offer price of 80 sen per share represents a 42.86% premium from 56 sen per share, which is the five-day volume-weighted average market price prior to July 11.

The proposed privatisation will also see the acceleration of the maturity and subsequent cancellation of Zecon's 44.16 million warrants.

The warrants were issued in March 2007 and will mature in March 2017. Based on their strike price of RM1.06 and a conversion ratio of 1 to 1, the warrant is trading at a 89% premium to its mother share price of 22 sen.

Accordingly, entitled warrant holders stand to receive a cash payment of RM1.14 million for the 22.84 million warrants not owned by the major shareholders, or five sen per warrant.

However, Zecon's warrant holders may be getting a raw deal as the proposed repayment of five sen is at a 77.27% discount to the last trading price on July 15. The shareholders have requested the cash repayment under the SCR and warrant cancellation exercises be funded from the company's own funds or via bank borrowings.

The major shareholders took into account the company's diminishing profit margins as a basis for the privatisation, and the necessity of private financing initiatives (PFI) for funding future projects.

Zecon reported net profits of RM6 million, RM1.68 million and RM1.01 million for the 2009 financial year (FY09), FY10 and FY11 respectively. The decrease in earnings was attributed to stiff competition from other players in the construction industry.

As PFI projects are capital intensive in nature and feature long gestation periods prior to recouping the original expenditure, Zecon will need to conserve its cash for the purpose of funding its operational requirements.

The group foresees the continuing intense competition in the construction industry will result in more competitive pricing to secure contracts, which in turn, will affect Zecon's financial performance going forward.



This article first appeared in The Edge Financial Daily, on July 16, 2013.