Sunday, 25 December 2011

YTL: why so stingy?

(lightly edited version)

On December 19, 2011 YTL Cement was suspended due to an announcement. Would Christmas come early for its shareholders? Unfortunately not, more like a visit from Scrooge.

YTL Cement announced it has received a take over notice from YTL Corp. The take-over would not be in cash, but through an exchange of YTL Corp shares, in a ratio of 1 for 3.17.

Some links to relevant articles, by far the most interesting one is the first from The Edge Malaysia:

From The Edge Malaysia:

From The Star:

"RHB Research Institute said the offer provided no premium for YTL Cement shareholders, while the timing was less than perfect. “The offer lacks an acquisition premium above the existing share price suggests that YTL Corp is not going all-out to privatise YTL Cement. “We also find the timing of this exercise less than ideal as we have generally expected that YTL Corp would only consider privatising YTL Cement after November 2012 when the existing Iculs (97% held by YTL Corp and related parties) can be converted into YTL Cement shares at a better conversion rate compared to now,” RHB Research said."

Unfortunately, this is one of those "infamous" General Offers with delisting and mandatory acquisition threats:

Rough data per share based on the last full year results (EPS and DPS) and last quarterly (NTA):

YTL Cement
Share price: RM 4.50
NTA:         RM 4.76
EPS:         RM 0.47
DPS:         RM 0.13

YTL Corporation
Share price: RM 1.42
NTA:         RM 1.20
EPS:         RM 0.12
DPS:         RM 0.02

The share of YTL Cement is trading at a discount of 5% to its Net Assets Value, the Price Earnings Ratio is only 9.6 and the dividend yield is a reasonable 2.9%. Its last few years of results have been outstanding, steadily rising.

YTL Corporation however is trading at a premium of 18% to its Net Assets Value, The Price Earnings Ration is higher at 11.8 and the dividend yield is only 1.4%. Results have been steadily rising, but less so than YTL Cement.

From any valuation point of view, YTL Cement is clearly the cheaper of the two, in other words, the more favorable to own.

It comes therefore as a huge surprise that YTL Corporation is not prepared to offer any premium in this deal to YTL Cement shareholders. The only criteria in their advantage would be increased liquidity, but this looks not very important. According to the last year report of YTL Cement 97% of the shareholders own 100,000 shares or less, 88% even 10,000 shares or less. It should be relatively easy to dispose of their shares in the open market for those small shareholders, so liquidity is not an issue.

Advantage of this deal:
  • More liquidity (not relevant for all small shareholders, the huge majority)

Disadvantages of this deal:
  • From a valuation point of view, YTL Cement looks like a clearly better choice than YTL Corporation
  • Minority Shareholders invested in YTL Cement, not in YTL Corporation, if they are forced to switch surely there should be some premium as a reward
  • Minority Shareholders will end up with odd lots, due to the ratio of 3.17 YTL Corp share for each 1 YTL Cement share, disposing of them will incur extra costs and effort
  • YTL Cement shareholders will receive less dividend yield from their YTL Corp shares, if they want to switch to other shares yielding a higher dividend, they will incur extra costs and effort

It therefore doesn't look like a good deal at all for Minority Investors of YTL Cement.

Unfortunately, in this kind of excercise Minority Investors hardly stand a chance to fight it.

Filing a complaint with the authorities (SC and/or BM) leads to absolutely nothing; the complaint will end up in a drawer for three years, and will then be dealt with in a very unsatisfactory and biased way. For the diehard optimists out there (to which group I also once belonged):

Contacting the MSWG is a possibility, they might be able to get some support in the newspapers, which could put some pressure on YTL Corporation to come with a better offer.

The best chance is if some larger minority shareholders are prepared to put up a fight. I don't expect anything from PNB, EPF, ValueCap etc (they had all the chances in the past to be active, vocal or to vote against deals and have blown them), but may be the Public unit trusts and a few foreign fund managers are prepared to try to get a better, more fair deal for minority investors.

I am simply baffled by the way this exercise is done, YTL claims it has excellent Corporate Governance (CG) culture on its website. But it is exactly in these exercises that good CG should show. Paying a premium of say 10-20% would be peanuts for YTL Corporation, while it would be a nice and helpful gesture towards YTL Cement shareholders, creating goodwill for all in the process.

This might be the last Malaysian corporate deal of 2011, and it is definetely not a good way to end the year.

I am hoping for some clear improvements in 2012.


  1. Hi Mr Wind do you think YTL corporation will acquire YTL Land? Since there is a very good potential for YTL Land but the market doesn't value this hidden jewel.

  2. For the time being, I think YTL has enough on their plate with YTL Cement, but I guess it is always a possibility if YTL Land is undervalued. The question is, if they are privatized, at what valuation?

    I have never been a fan of holding companies listing their subsidiaries, there is always conflict of interest and RPT's going on. Much more fair to list just the holding company and let the investors buy those shares.

  3. But after the subsidiaries are listed, the holding company and the majority shareholders can become super rich.

  4. Without listing subsidiaries that also can happen. And you don't have conflict of interest, Related Party Transactions, possibility of delisting of subsidiary, etc.

    All shareholders are in the holding company, so all noses are pointed in the same direction.

  5. Despite the offer made is close to the 7th anniversary of the ICULS (10 November 2012) whereby the conversion price of the ICULS to mother shares will be adjusted from RM2.04 to RM1.82, shouldn't the offeror and the independent adviser take the step down conversion price into consideration as the adjustment is just few months away?

    Both the offer document dated 9 January 2012 and the independent advice circular appeared to be silent on this.

    The Board of YTLCMT confirmed that to the best of their knowledge and belief, there are no materials facts, the omission of which would make any statement in this IAC misleading.

    But is not the adjustment in conversion price with difference of 10.8% significant and should be highlighted in the documents?