PepsiCo likely to approve Permanis deal

Group said to have existing relationship with suitor of soft drink maker PETALING JAYA: US-BASED PepsiCo Inc will likely give its consent for the change in ownership of soft drink maker Permanis Sdn Bhd under the proposal by Japan's Asahi Group Holdings Ltd to fully acquire Permanis from CI Holdings Bhd. Analysts
said PepsiCo has an existing relationship with Asahi, with the latter
having acquired PepsiCo's franchisee Schweppes Australia in 2009 and
therefore, increasing its chances of giving its approval. Just
last year, CI Holdings and PepsiCo inked an unprecedented exclusive
bottling agreement, which renewed the franchise bottling rights of
Permanis for another 10 years. “We believe PepsicCo is likely to approve the deal. Major shareholders Datuk Johari Abdul Ghani, Sisma Group
and Continental Theme collectively own 60.4% of CI Holdings, which
further increases the chances of the deal going through although some
risks remain,” OSK Research said in a report on Friday. The risks
include the relevant approvals and consents needed for the deal going
through, with PepsiCo's consent being one of them. On Thursday, CI Holdings told Bursa Malaysia that Asahi was looking to buy Permanis for RM820mil. CI
is keen to sell all of its 70 million Permanis shares to Asahi as it
believes that it is the right time to unlock the value of its investment
in Permanis at an attractive valuation. Its original cost of investment
for Permanis was RM72mil done in April 2004 and should results in a
proforma gain on disposal of RM677.1mil. The selling price was
based on several factors, including Permanis' after-tax profit of
RM33.28mil for financial year ended June 30 2010 (FY10) and RM24.34mil
for the unaudited nine-month period ended March 31 2011. Aside from
this, the price was determined based on Permanis' net asset of
RM76.33mil for FY10 and RM95.44mil for nine-month period as at March 31
2011 as well as the general outlook for the beverage industry in
Malaysia, the market valuation of comparable beverage producers and
Permanis' future prospects. The principal activity of the
Permanis is to sell, bottle and distribute beverages. It has two
exclusive bottling agreements with the PepsiCo Group,
which grants it the exclusive rights to bottle, distribute and sell the
Pepsi brand of soft drinks such as Pepsi, Tropicana, Mirinda, 7-Up,
Gatorade, Mountain Dew, and Lipton in Peninsular Malaysia and Sabah.
Permanis also has its own proprietary brands such as Chill (Asian drink)
and Bleu (water). OSK Research said the offer price of RM5.77
per share values Permanis at 24.7 times trailing price-earnings (PE)
multiple (based on Permanis FY10 earnings per share of 23 sen).
“Although the acquisition valuation of 6.1 times price/EBIT (earnings,
before interest and taxes) based on the offer is not as attractive as
that Asahi paid for Schweppes Australia (of 23.7 times price/EBIT), in
view of the tough operating environment going forward, we think the
offer is good enough as it represents a 53% premium versus CI Holdings
local peer average PE of 16.1 times and is a 34% premium over our
previous fair value of RM4.30.” CI Holdings, which resumed
trading last Friday after the disposal announcement, gained 53 sen to
end at RM4.61 with some 5.07 mil shares changing hands. Despite
OSK Research raising its fair value to the offer price, it advised
investors to take profit and sell into strength given some uncertainty
on whether the deal will proceed, over how CI Holdings would utilise its
huge cash proceeds (although management has a track record in growing
Permanis) and when it would reach a decision as well as the recent rally
seen in its share price. CI Holdings said it would look to use the cash from the deal to buy a new viable business and or distribute to its shareholders. “Given
that CI Holdings intends to maintain its listing status and the fact
that its DOE business is still small and growing, the group is likely to
invest the proceeds in a new business,” OSK Research said. CI Holdings spokesperson had told StarBiz on
Thursday that under listing regulations, it would have 12 months to
regularise its position, therefore either looking for a new investment
within that timeframe or failing which, it would have to distribute the
sale proceeds to shareholders. With the sale of Permanis, CI Holdings is left with its tap and sanitary ware business via DOE Industries Sdn Bhd and its units. Permanis
accounts for 93% and 87% of CI Holdings FY10 revenue and net profit
respectively. The DOE business generated a top- and bottom-line of
RM36.1mil and RM2.4mil in FY10 respectively. “While this tap and
sanitary ware division continue to perform strongly in the first nine
months of the current financial year with revenue and net profit of
RM33.6mil and RM4.8mil respectively, it will take time to grow this
division,” said OSK Research. While OSK Research has not
indicated what sort of business venture CI Holdings may look at next, a
MIDF analyst covering the stock had said previously that the company
could look at a business within the food industry, given its experience
operating in a beverage industry. However, CI Holdings in not
allowed to engage in another ready-to-drink beverage business locally
for three years under its sale agreement with Asahi.