Quek’s poker game for Hong Leong Capital

Saturday June 29, 2013
Quek’s poker game for Hong Leong Capital
By RISEN JAYASEELAN 
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AS corporate takeover sagas go, Hong Leong Capital Bhd (HLCap) will go down as one of the more colourful ones in Malaysia's corporate history. The usually savvy tycoon Tan Sri Quek Leng Chan ought to have wrapped up the privatisation of the investment banking and asset management unit of his group by now.

Alas, he is faced with a stock whose price has surged several hundred percent beyond what he first offered to pay.

To recap, Quek used his flagship holding company Hong Leong Financial Group Bhd (HLFG) to make the buyout offer of HLCap on Jan 14. The offer had failed as at the closing date of acceptance, Feb 25. HLFG only garnered 81.33% of HLCap shares in that takeover attempt.

The thorn in Quek's side is low-profile property developer Datuk Dr Yu Kuan Chon, who has accumulated 21.3 million HLCap shares, giving him a stake of 8.65% as at last count.

The saga has now drawn in one of Quek's key lieutenants, the investment banker Lee Jim Leng. Jim Leng, as she is better known, heads Hong Leong Investment Bank (a key asset of HLCap) and filings showed that Jim Leng had on June 19 exercised one million HLCap stock options at a price of RM1.20 apiece.

The implications of this were significant, with the enlarged share base of HLCap increasing by 0.4%. And as Jim Leng is considered a key member of Quek's management team, she isn't considered as part of the public shareholding of HLCap.

The exercise of her warrants nudged the free float of HLCap to below the 10% threshold, thereby enabling HLCap, in accordance with Bursa's listing rules, to announce that it will suspend trading in its shares on Aug 12, or 30 market days after the 10% threshold was hit.

Recall that just recently, in March, HLCap had issued the same notice, only for Bursa not to go ahead with the suspension as the free float had gone back up to the 10% level within that 30 market day period.

In that instance, it was the savvy Yu who made it happen. He simply sold down some of his shares to ensure that the free float stayed above 10%.

For those unfamiliar with Yu and his involvement in the HLCap saga, Yu had suddenly emerged with a substantial stake in HLCap at just about the time that the buyout was announced.

Yu had continued accumulating HLCap shares since then and is probably the main reason why the counter is now trading at a whopping RM5.50 per piece, or three times the RM1.71 Quek had offered to buy them for.

The shares scaled to a peak of RM7 a piece on June 14, before succumbing to the market rout.

A suspension in trading of a stock is always bad news for minority shareholders because it means they can no longer sell their shares in the open market. The threat of suspension had worked to force minorities in buyout situations to throw in the towel in the past.

But is Yu that kind of a minority shareholder?

In other words, he may not mind staying on as a nagging minority shareholder of HLCap, even if the stock is suspended from trading, until a good deal is presented to him by Quek and Co for his stake.

Furthermore, if Yu remains a minority shareholder in the suspended HLCap, he would have a big say during HLCap's next AGM later this year, especially when voting on related party transactions (RPTs) within the Hong Leong group. (In RPTs, the related parties would not be allowed to vote, and that includes HLFG that currently owns over 81% of HLCap).

Then again, it is likely that Yu or parties linked to him have been aggressively selling their shares yesterday, considering that HLCap shares dipped by around RM1, or 15%. Yu is likely offloading those shares to ensure that the free float rises to above 10%, something he has successfully done in the past.

The question is, will Yu be able to keep selling enough shares to ensure that the free float stays above 10%? Or will there be more Esos exercises by high-ranking officials of the Hong Leong group?

A check on HLCap's 2012 annual report showed that a total of 4.475 million stock options granted under the company's ESOS to directors and chief executives of within the HLCap group of companies.

All options remain outstanding as at June 30, 2012. The report also indicates that no options were exercised during its financial year ended June 30, 2012.

According to stock exchange filings by HLCap, Jim Leng had on Jan 16 been given options to subscribe to two million HLCap shares.

Filings also showed that Jim Leng had on Feb 22 exercised 450,000 of those options at a price of RM1.42. Significantly, filings two days later showed that Jim Leng “sold” those 450,000 shares into the buyout of HLCap by HLFG.

Hence, the recent exercise of her one million options is the balance from the two million she was granted earlier this year. It is also understood that Jim Leng had been given another 1.5 million options earlier.

It is likely, therefore, that Jim Leng has another three million options of HLCap shares to exercise.

Jim Leng's stock options

But the question remains as to why Jim Leng did not exercise all of her options during the buyout period and turn that into acceptances from HLFG's buyout of HLCap. Wouldn't that have helped the case of Quek's buyout of HLCap?

To be noted is the fact that Jim Leng, after forking out the RM1.2mil to exercise the one million options recently, had sold 34,000 of those shares into the market at prices ranging from RM6.83 to RM6.96 a piece, giving her gross returns of some RM234,260.

The question is whether she will sell more into the open market, or hold on to the bulk of those shares, a move which inevitably affects the stock's free float.

Incidentally, there has also been market talk that these events have done some collateral damage to another key Hong Leong personality, although this could not be verified.

Stalwart banker, Datuk Yvonne Chia, resigned as CEO of Hong Leong Bank Bhd in March. The reason cited then was simply that she was retiring.

However, rumours are circulating that Chia may have had to leave because she failed to support HLFG's buyout by selling her holdings or stock options during the takeover earlier this year.

All parties related to this story could not be reached for comment.

The market will be watching closely to see how this unfolds and what other cards will be pulled or placed out by the savvy corporate players in this game of poker.

Related Story:
The major players in the Hong Leong Cap saga