E&O deal hogs limelight

Sime has got the biggest chunk of E&O, but was the price worth it?

THE pundits have it. For the last month or so, the rumour mill was working overtime around Eastern & Oriental Bhd (E&O), the luxury lifestyle property developer, that a merger or acquisition was in the works.

First came the persistent speculation that SP Setia Bhd would merge with E&O, which was soon quashed by SP Setia. Then last week - quite out of the blue - Sime Darby Bhd announced it was acquiring a 30% stake in E&O for a significant premium over the latter's share price.

In early August, E&O's shares galloped to a three-year high of RM1.75 on the back of the SP Setia merger rumours, then came down again in line with the global stock slump. Yet, amid the broader market sell-down a few weeks later, its stock again saw aggressive trading, this time from its own shareholders who appeared to be upping their stake.

The notable ones included GK Goh Holdings Ltd, a substantial shareholder of E&O, and Datuk Azizan Abd Rahman, a director of E&O. According to shareholder changes filed with Bursa Malaysia, GK Goh had bought 1.25 million shares in three days, raising its stake to 11.6%, while Azizan acquired 100,000 shares.
Coveted land: Phase one of Seri Tanjung Pinang in Tanjong Tokong. A second phase comprising two islands of 740 acres of land will be reclaimed around the area next year.

The upward trend in E&O's share price can be observed since Aug 24, from RM1.43 to Friday's close of RM1.60, an 11.9% increase.

The deal with Sime Darby, which E&O called a “milestone” development, raised more than a few eyebrows about why such a high price was paid. The share sale agreement is for Sime Darby to acquire 273 million shares in E&O and 60 million irredeemable convertible secured loan stocks, representing a 30% equity interest, for RM766mil cash.

The sale price works out to RM2.30 per E&O share, which is a 58.6% premium over the stock's pre-suspension price of RM1.45. Sime Darby came out in defence of its purchase, saying the RM2.30 was actually a 20% discount to E&O's estimated realisable net asset value of RM3.2bil or RM2.88 per share.

Upon completion of the deal, slated for Sept 9, 2011, Sime Darby will be the single largest shareholder of E&O.

E&O's largest project is the 980-acre Seri Tanjung Pinang seafront development, a coveted address in Penang.

To recap, the 30% block in E&O was acquired by Sime Darby from three substantial shareholders: E&O managing director and founding member Datuk Tham Ka Hon, Tan Sri Wan Azmi Wan Hamzah and Singapore-listed GK Goh.

The trio's collective 41.7% shareholding in E&O will be diluted to 11.5% post-acquisition.

Tham, previously the largest shareholder with 15.7%, will end up with a 5.1% stake while Azmi and Goh will have 3.5% and 2.9% respectively.

A sore point with analysts is the high price paid for E&O. TA Research said the price was 19 times E&O's forecast earnings for 2012 and 1.85 times its price to book value based on consensus estimates. By comparison, the property sector has an average of 12 times forecast earnings for 2012 and 0.8 times price to book value.

Kenanga Research also noted that since Sime Darby was expected to equity account E&O's earnings on an associate level, that would only translate to a meagre 0.6% increase to Sime Darby's profits in 2012 and 2013.

It suggested that management might have been better off using the RM766mil to expand its plantation land or motor segment in China.

A local broker, however, had a more pragmatic view, saying that although Sime Darby was keen to venture into high-end development, it did not necessarily want to obtain everything at one go via a general offer, which would have been a much riskier proposition.

“Furthermore, E&O's shares in the open market are quite fragmented and not very liquid, making the task of acquiring 30% quite cumbersome and time-consuming.

“By getting the substantial shareholders to agree on a share sale proper, Sime Darby avoided facing a hostile takeover situation,” she said.

In terms of mutual benefits, Kenanga pointed out that phase two of the Seri Tanjung Pinang development might have factored strongly in the deal.

The project, estimated to have a reclamation cost of between RM3.2bil and RM3.5bil and a gross development value of RM9bil to RM10bil, could do with the financial muscle of a company like Sime Darby,