Sunday, November 25, 2007

Privatisation of Magnum gets investors fired up

By the Star Biz

Multi-Purpose Holdings Bhd's (MPHB) proposal to take its 55.54% subsidiary Magnum Corp Bhd private has gotten the investing community crunching the numbers to hazard a guess on how attractive the deal will be for the diversified group.

While details on the deal are still being ironed out, analysts are especially excited about MPHB's cash position on completion of the exercise.

“It is an interesting capital repayment exercise,” an analyst told StarBiz.

Under the proposed deal, MPHB together with private equity firm CVC Asia Pacific Ltd will form a special purpose vehicle (SPV) to take Magnum private at RM3.45 per share.

MPHB and CVC will hold 51% and 49% equity interest respectively in the SPV that will own Magnum. The SPV is expected to pay out some RM4.9bil to take Magnum private - RM2.7bil to MPHB and the remaining RM2.2bil to other shareholders.

The proposed privatisation exercise, valued at RM4.9bil, will be funded by interest-free loans provided by the SPV and borrowings by Magnum.

The deal would see Magnum becoming a wholly owned subsidiary of MPHB and then be delisted from the stock exchange. Currently, of MPHB's 55.54% stake in Magnum, 6% is for shares held for MPHB's exchangeable bonds, which can be exchanged for Magnum shares at RM3.04 per share.

Analysts said since the conversion price is lower than the offer price of RM3.45, bondholders who converted the bonds into Magnum shares and accepted the offer stood to profit from the price difference.

In an interview with StarBiz, MPHB managing director Datuk Surin Upatkoon said at the current stage, the idea was to implement the selective capital reduction exercise.

“When we hold 100% in Magnum, we will sell the company to the SPV. That part of the deal is subject to final negotiations; this is as far as we can say, at this stage,” he said, adding that the company would “leave it” to minority shareholders to decide.

He said at RM3.45, the numbers forecast operator was valued at a price to earnings ratio of 21.5 times and book value of 4.2 times based on its balance sheet as of Sept 30.

“We want to do a fair deal and are doing it via two steps. First, we have to take Magnum private, then CVC will come into play.''

Upatkoon said the takeover offer provided an opportunity for investors to cash out as the gaming industry was entering a mature cycle. “If not for a partner, we would probably not privatise. It involves a lot of money,” he said.

“We have to borrow RM2.2bil to pay (to privatise) and displace the minority shareholders. It will be a combination of capital and debts but we are not ready to discuss this as we are still negotiating the terms with CVC.

“CVC will have to put in some money but it is going directly into the SPV and not to MPHB,” Upatkoon said.

“Basically, there will be money flowing into MPHB but how much will depend on the levels of equity and borrowings,” he added.

Analysts said if Magnum opted for a debt to equity ratio of 50:50, and with fresh capital from CVC, MPHB might be able to get a capital repayment of about RM1bil from Magnum.

On the valuation of MPHB after the exercise, Upatkoon said: “Everything will look much better. We will have direct cash flow. The most immediate is the RM300mil in exchangeable bonds if shareholders choose to convert those bonds.”

“Obviously, to do this deal, there must be some upside for MPHB,” he added.

Upatkoon said over the past five years, the company had been looking at ways to re-engineer and restructure operations to “further strengthen” its earnings and to ensure growth.

“This is going to be our best year yet. Just look at our results for the nine months just ended.''

For the nine months ended Sept 30, the company made a net profit of RM339mil on sales of RM2.4bil compared with a net profit of RM104.4mil on revenue of RM160.5mil for the same period last year.