Wednesday, 24 October 2012

KFC: disposal and capital repayment

KFC has published the circular regarding the disposal of its business and the subsequent capital repayment, which effectively implies a General Offer of RM 4.00 per share and RM 1.00 per warrant.

I received the following comment in another posting:

"What are your views on the KFC Holdings (Malaysia) BHD situation? This deal has been dragged out for almost a year, in which time Malaysian peers’ share prices have rallied between 70% to 80%, dividends at KFC have been halted, and in Affin Investment Bank’s Independent advice they use comparable multiples based on last prices from 13th December 2011, highly illogical and against conventional market practice. Surely minority shareholders are getting a raw deal here and would be better off voting the deal down? I am surprised that this has not received much attention in Malaysia, this is another example of poor corporate governance."

I have sympathy for the above, although I find the independent advice in it self not bad (I have seen much worse). Affin did use many comparison methods and quite detailed so, they put a decent effort in writing their independent report in my opinion.

I do agree though that many times (not only in the independent advice but anywhere in the prospectus) comparisons have been made with the situation in 2011, when in reality an updated comparison for 2012 also could or should be given. There is almost a full calendar year difference.

Also, the company has indeed stopped paying dividends, the last dividend was only 3 sen on Oct 7, 2011. This in itself deserves a discussion regarding the reasons for this.

My opinion is that given the cash generating nature of the business and the established brand name, the offer price per share appears somewhat undervalued. However, KFC was never a company with the best CG practices in Malaysia, given that I find the offer price about fair.

And lastly, the offer per share is RM 4.00 and the offer per warrant is RM 1.00. Assuming that the price per share is fair, then the price per warrant is highly unfair. The exercise price is RM 3, and the ex-date is on September 14, 2015, almost 3 full years away. In other words, warrant holders do not receive any money at all for the time value of the warrant.

I have noticed this before (warrant holders being hugely disadvantaged), for instance here, and find it worrisome. Are warrant holders sufficiently warned that they could expect a lousy deal in case the company is privatised?


  1. You wrote: However, KFC was never a company with the best CG practices in Malaysia, given that I find the offer price about fair.
    With all due respect, isn't that the same as saying, oh since this guy's been stealing for a long time, it's OK for him to steal one more time? Two wrongs do not make a right!
    And what kind of standards are you using when you condone Affin's using dated figures. Using numbers from a year ago for a transaction today is OK? Can we walk into a car showroom and offer to buy a car today using last year's prices?

  2. I agree that there is something strange in discounting the value of the offer price for bad CG. This would encourage bad CG, driving down the share price, and enabling a low offer price. This has indeed happened many times in Malaysia and went unpunished in the large majority of cases.

    On the other hand, for my personal valuation, CG is an important factor, and thus I find the offer price "ok". If that is fair is another matter, if shareholders are forced to sell the price should be more than fair, not just fair, there should be a clear premium above fair.

    For the independent report, there are methods and data. The methods used to be absolutely horrible for the last decade, pick any report and you will see how amazingly bad they are. This report however has decent methods with enough detail and viewpoints.

    Data: they want to justify the offer price on the moment it is done, which is understandable, so they use the old data. But of course, relazing that the data is one full year old, they should also have done the same with current data since a lot has changed and the whole process took so long, I agree with that.

    The glass is half full while I have seen so many empty glasses in independent reports. I guess that explains why I am not too harsh in this case.

    Or may be I am getting old .....