Monday March 4, 2013
HLFG's attempted takeover of Hong Leong Capital raises questions
Corporate Notes by Gurmeet Kaur
THE attempted takeover of Hong Leong Capital Bhd (HLCap) by Hong Leong Financial Group Bhd (HLFG) serves up several lessons for the corporate world, for one the strong message that minorities do not tolerate being bought out cheap. At the same time, it has also raised some questions.
For a start, it remains unknown as to why Tan Sri Quek Leng Chan via HLFG, where he has a 78.78% interest, had opted to use the Takeover Code to take private HLCap. In fact, Quek and HLFG should be commended for using this method and the fact that the proposed takeover has failed, shows what an onerous takeover route this is. The case also highlights why the takeover code enhances the rights of minority shareholders.
The code requires HLFG to get 90% acceptance of the shares it does not own in HLCap to trigger a compulsory buyout of the remaining shares.
This means an acceptance of 18.4% of shares from unrelated parties or about 98.4% of the company's entire share capital. With only 2.21% of HLCap's minority shareholders accepting the RM1.71 offer from HLFG, this brings HLFG's interest in HLCap to 81.3%. HLFG is thus unable to compulsorily acquire the remaining shares of HLCap.
What is worth noting though is that in most of the banking mergers and acquisitions in recent times, the popular takeover method used was the “assets and liabilities” route under the Companies Act.
This is where the offeror makes an offer to the company's board of directors to buy all the assets and liabilities of the target company for a fixed price. Investment bankers say this a more efficient way of taking over financial institutions which tend to have fragmented shareholdings.
The board then decides if this offer is good enough to be presented to shareholders. If the decision is made to put the matter to vote, the offer will need the nod of 75% of the target companies' non-interested shareholders. Once the deal is done, the offeror pays the money to the target company, which in turn typically distributes that money to shareholders, on a per share basis.
Although the takeover method via the Companies Act does not technically involve the offeror buying the shares of the target company, there is still a takeover price per share that is given, so shareholders know what they are getting from the deal. This is the route Hong Leong Bank Bhd (HLB) took to merge with EON Capital Bhd about two years ago and before that in 2006 CIMB Group's takeover of Southern Bank Bhd.
Compare this to the 90% threshold required from the Takeover Code and it's clear that the Companies Act rule is a seemingly easier method.
Back to the HLCap situation. HLFG has said that it planned to take private the former and did not intend to maintain its listing status.
Past reports have speculated that HLFG may eventually inject HLCap - which houses the group's broking and investment banking businesses - into HLB. HLFG owns 65% of HLB.
This rationalisation exercise, some say, comes ahead of the new Financial Services Act that will come into force in May, which may force Quek together with other banking bigwigs like Tan Sri Azman Hashim of AMMB Holdings, Tan Sri Teh Hong Piow of Public Bank and Datuk Khatijah Ahmad of KAF Seagroatt & Campbell, to pare down their stakes in the financial institutions they own.
Some quarters view that taking private HLCap would make it easier for Quek to restructure his banking operations to prepare for the FSA.
While Quek may have failed in his bid to take HLCap private and theTakeover Code stipulates that HLFG would have to wait another six months before it can launch another general offer for the shares of HLCap, there may still be the asset and liability route option via the Companies Act that Quek can take.
There is the possibility of HLB launching a takeover of HLCap by buying its assets and liabilities. If this scenario were to pan out, HLB would require 75% shareholder acceptance by HLCap.
Whatever the case, the saga has thrust low-profile entrepreneur Datuk Dr Yu Kuan Chon of YNH Property Bhd into the limelight as he has now emerged as HLCap's new major shareholder with close to a 9% stake. Will Yu emerge the dealmaker or breaker? If Yu lends his support in the scenario that HLB launches a takeover of HLCap via the assets and liabilities, the deal is likely to go through.