Halcyon Agri/GMG Global M&A: What Should Halycon Shareholders Do?

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Halcyon Agri Corporation (“HAC”) and GMG Global (“GMG”) were recently in the spotlight due to certain proposed merger and acquisition transactions. The relationship between the parties involved in proposed transaction makes for interesting analysis and learning. Thanks Ken for highlighting it to us during our workshop. In this article, we examine what HAC shareholders should do with their shares.

The Proposed Transactions

There are 3 proposed transactions:

  1. Sale of 30.07% of HAC issued shares at $0.75 apiece to Sinochem International (Overseas) Pte Ltd (“SIO”). This triggers a mandatory offer for the remainder of the shares at the same price. SIO is guaranteed a minimum 53.98% ownership from the exercise with Credence Capital Fund II agreeing to make up for any shortfall below that mark.
  2. Voluntary general offer for GMG shares by issuing 0.9333 HAC shares for 1 GMG share when Transaction 1 is completed. SIO has given its irrevocable undertaking that would result in HAC owning at least 51.12% of GMG.
  3. Acquisition of natural rubber processing facilities and trading business (“NR Assets”) from SIO via issuance of 280 million new HAC shares to SIO at an issue price of $0.75 per HAC share. This gives a total consideration of S210.0mn.

Transaction 1 is conditional upon Transaction 2 and 3 being approved by HAC shareholders which is to be held on 2nd June 2016. With major shareholders Sam Goi Seng Hui and Credence Capital Fund II voting in favour of transactions 2 and 3, HAC will have the necessary majority (62.73%) to complete them. Therefore, HAC shareholders have 2 options. They can either sell their shares to SIO at $0.75 a share, or keep their shares and participate in the expanded business which includes the stake in GMG and the NR assets.

Framework for Evaluation

Naturally, shareholders should go for the better option, but how do we define ‘better’ in this situation? The quantitative approach – one which we are going to undertake – would be to estimate the intrinsic value of HAC, pre- and post-transactions.

Let’s say the current fair value of HAC shares is $0.50 and the post-transaction fair value is $0.40. This tells us whether HAC shareholders are losing or gaining value from the transactions. If there is a loss, shareholders should sell their shares at $0.75. Otherwise, they should retain their shares.

Current Intrinsic Value of HAC

For simplicity sake, we are going to assume that the pre-transaction share price is the pre-transaction fair price of HAC. HAC shares traded around the $0.70 mark for a few months before the deal was announced and that’s the price we are going to use.

This assumption is important, as it allows us to isolate only the effects of the proposed transactions without having to account for the possibility of any pre-existing mispricing which is a wholly separate issue altogether.

Based on HAC’s FY15 financial performance, HAC had 1.95 cents in EPS and 29.84 cents in NAV per share. This corresponds to a 35.9x P/E and 2.4x P/B.

Post-Transaction Intrinsic Value of HAC

After the completion of the GMG and NR Assets acquisition, HAC will have a 0.35 cents EPS and 66.78 cents NAV per share with 1,595.0m issued shares (up from 600.1m shares). This is based on the FY15 results for all entities and also assumes that 100% of GMG’s shares are acquired via the share swap.

Theoretically, the post-transaction intrinsic value of HAC should be equal to the sum of all constituent entities at pre-transaction valuations. This includes $420.0mn for HAC, $436.6mn for GMG (based on $0.57 share price) and $210.0mn for NR assets (we assume this is fair value for now). Therefore, the post-transaction share price of HAC should be $0.67.

Final Words

Given that the post-transaction share price is lower than the pre-transaction share price of $0.70, HAC shareholders should sell their shares to SIO at $0.75.

However, do take note of the underlying assumptions that have led to the aforementioned conclusion. We have assumed that the pre-transaction share prices to be the fair values in order to isolate the effects of the proposed merger and acquisition transactions. We have also assumed that all of GMG’s shares are acquired and that the fair value of NR assets is $210.0mn.

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Sui Chuan holds an honours degree in Business Administration (Finance) from the National University of Singapore (NUS) and recently passed his CFA Level 1 Examinations. He was featured on the Sunday Times and the Business Times’ Young Investor column in 2013. Sui Chuan has experience in both sell-side and buy-side research.

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