Special purpose vehicle set up in RM5.24bil KFC-QSR deal

KUALA LUMPUR: Johor Corp (JCorp) and CVC Capital Partners, a global private equity firm, are offering to privatise KFC Holdings (M) Bhd and parent QSR Brands Bhd at an estimated RM5.24bil or RM4 per KFC share and RM6.80 per QSR share.
The exercise would be conducted through a special purpose vehicle, Massive Equity Sdn Bhd, with CVC eventually holding a 49% stake in both businesses that operate more than 900 KFC and Pizza Hut fast food outlets in South-East Asia and India.
According to Bloomberg calculations, the deal, excluding warrants, would cost more than RM5.24bil (US$1.6bil).
Shares of Kulim, QSR and KFC were suspended yesterday upon their request to Bursa Malaysia,
Massive Equity, in a statement, also proposed that:
KFC
and QSR each implement a warrant holders' scheme to buy back all
outstanding warrants, based on RM1 per KFC warrant and RM3.79 per QSR
warrant respectively. CIMB Investment Bank Bhd has been appointed the financial adviser to Massive Equity.
KFC
and QSR carry out capital repayments and/or pay special dividends to
return substantially all amounts received from the acquisition of the
two companies.
“KFC and QSR businesses will be merged into an
enlarged regional food retailing business,” JCorp said. “Given the
current outlook and volatility of the equity markets, both the KFC and
QSR offer prices are considered attractive. The offer price for QSR is
higher than previously offered made by other interested parties,” it
added.
On Tuesday, QSR and KFC's shares last traded at RM6 and
RM3.41 respectively; the offer represents a privatisation premium of
13.33% and 17.3% to their last traded price on Tuesday.
Based on
KFC's weighted average price of RM3.38 for the last three months up to
and including Dec 13, 2011, the offer price represented a premium of
18%; meanwhile, based on its weighted average price of RM5.68 for the
last three months up to and including Dec 13, 2011, the QSR offer price
represents a premium of 20%, JCorp said.
A JCorp spokesperson
said this was part of the bigger restructuring plan that JCorp was
undergoing and aimed at streamlining its businesses; the shareholding
structure, at the moment, was convoluted and thus hindered effective
management of its businesses.
“This will facilitate fundraising
and the leveraging of operating assets which is part of JCorp's overall
rationalisation programme; at the same time, it will also address the
debt issue at JCorp,” he said in an interview. JCorp has debt
obligations of RM3.6bil that will mature in the middle of next year.
The
spokesperson added that CVC, which also has interests in the food and
beverage as well as retailing industries will participate actively in
the management of both the businesses of KFC and QSR.
“We will
work closely with CVC to create value by enhancing the operational and
financial perfomance of the businesses,” he added.
Analysts said
it was an attractive offer for short-term investors who had gained on a
good low entry price into the stock. However, some said the deal could
be sweetened further, given that KFC was a growth stock with exposure to
countries with attractive demographic fundamentals such as India,
Singapore and Brunei.
It is also learnt that KFC is expanding further into Cambodia and Vietnam.
“QSR
and KFC are the jewels in the crown of JCorp and I am not surprised
that this offer had been made. However, investors may want to think of
the growth potential of these companies before agreeing to the deal,” an
analyst with a local bank-backed brokerage said.
“In the
interest of minority shareholders, they may want to push for a deal at a
higher price. I doubt the deal would go through so easily, given the
good brand positioning potential that KFC and Pizza Hut has in the Asian region.
“The
future looks bright and the stock's fundamentals are sound, so
investors should hold out for a better price,” said another analyst.
CIMB
said in a note to investors that it was not entirely surprised by this
offer, given the present convoluted shareholding structure from JCorp
all the way to KFC.
JCorp owns 55.9% of Kulim, which owns 53.9% of QSR, which in turn, has a 50.93% stake in KFC.
CIMB said a buyout of QSR and KFC would increase the dividends and cashflows that JCorp earns from KFC.
“JCorp
has RM3.6bil of bonds maturing in July 2012. The buyout of both QSR and
KFC and the resultant higher dividends and cashflows will help greatly
in refinancing the bonds and servicing future interest payments,” CIMB
said in its investor alert note.