Saturday, 31 December 2011

Horrible deal for Hirotako Warrant holders

MBM Resources offered on October 27, 2011 to buy all shares in Hirotako for RM 0.97 per share. If that is a decent offer is beyond the scope of this posting, I don't find it a very rich price, on the other hand this type of company (its business is manufacturing of car parts) is often going for a low valuation. The price offered was at a nice premium to its last transacted price. On the other hand, this was again one of those "infamous" offers with the threat of delisting and mandatory acquisition, Bursa Malaysia seems to get a reputation for this.

Apart from shares there were also warrants of Hirotako. They were only listed February 2011, have an exercise price of RM 0.92 and are maturing February 2016. Since an offer was made for the share, an offer also had to be made for the warrant. However, the offer price was an unbelievable low RM 0.05, not taking into account any of the benefits of warrants.

This is what the independent adviser (Interpacific Securities Sdn Bhd) wrote about the warrant:

But the time value is a very important component of the value of a warrant.

The most common way to value a warrant is the Black-Scholes Model:

A 60% discount to the fair value? This offer sounds tremendously unfair to warrant holders.

The effect of the offer on the share price:

The effect of the offer on the warrant price:

Rather different pictures, to say the least.

And this is the conclusion from the independent adviser (with which the Board agreed):

Fairness for Warrants offer: Not Fair.

Section 31 of the Code for the Malaysian Code for Take-Overs and Mergers says the following:

Was there an "appropriate offer"? And what about: "safeguard their interest"?

The strange aspect is that it would have been very simple to offer something that is fair. One way is to offer a decent price for the "time value" of the warrants based on the Black-Scholes model.

The share holders have accepted the offer in an EGM on December 15, 2011 and the shares and warrants have been delisted on December 29, 2011.

Is there not a duty for the Board of Directors to assure fair treatment of the warrant holders?

And why did the authorities not act to protect them?

And lastly, an offer that is clearly unfair, I think the recommendation for warrant holders should be not to accept the offer.

If every single independent report always ends with a recommendation to accept the offer (which is the case on the Bursa Malaysia), then what is the use of it? Better stop with these reports, it saves a lot of money, time and hassle, and gives the minority share holders or warrant holders some chance to fight.


  1. In this case, it seems when the independent adviser evaluated the reasonableness of the warrant offer price, the offer price seems irrelevant but the tradability of the warrant.

    It is just short of saying you have very limited choice but to sell the warrant at any price offered even if the warrant offer price is less than 5sen/ warrant.

    Else, at what price the independent adviser would feel the offer is unreasonable?

  2. Thanks for your comment.

    The warrant still had more than 4 years to go, if the share price woiuld go to say RM 1.42 (very reasonable assumption, Hirotako is a good company and the current price is not expensive at all at RM 0.97) then the warrant would be worth RM 0.50, 10 times as much as what they received.

    Downside RM -0.05, Upside RM +0.50

    Is that reasonable?

    If the adviser finds tradeability reasonable (as you suggest), then all offers are reasonable by definition. And thus all have to be voted in favour, and that is indeed always their suggestion.

    Caught between a rock and a hard place, but surely that should not be the case. It is very clear in the rules that minority shareholders / warrant holders should not be in that place, should not be pressured, should receive a fair treatment.

    I am simply amazed how badly the warrant holders were treated, but aparently nobody cares. It slipped my attention, otherwise I would have written about it before. Not that it would have made a difference.

  3. "If the adviser finds tradeability reasonable (as you suggest), then all offers are reasonable by definition."


    At offer price of merely 5 sen, they still have the "conscience" to comment that it is reasonable, incredible... Malaysia Boleh

    Yup. That's the point I wish the "independent" adviser would clarify...

  4. Me too, but I don't think the adviser will ever clarify .....

    But where are the authorities?

    I am not a legal expert, but I get the impression that only the shareholders had a chance to vote at an EGM, and they voted in favour (not a surprise). But why did the warrantholders not get a chance in their own EGM, I am sure they would all have voted against this deal. And that would have forced MBMR to come with a better deal.

  5. Wonder if warrant holders face similar issue in Singapore? And is there any regulation in Singapore that addresses this issue.

  6. I am afraid I don't know, I haven't seen this happen yet in Singapore, an offer for the shares of a company when there are warrants outstanding.

    From what I quickly read, an EGM for warrant holders MAY be called, vague language, useless, either they have to call it or not. They get away with not calling it, meaning the warrant holders don't have much rights at all, very surprised by that, surely that is wrong and should be dealt with.