On July 19, Hwa Hong Corp has clarified three main points made by The Edge Singapore in our story Hwa Hong’s IFA says competing offer should consider higher fees.
In it, we said SIC required that each potential competing offer must announce a firm intention to make an offer by 5.00 p.m on July 25. The July 19 Hwa Hong announcement adds that each competing offeror must announce a firm intention to make on offer for the company or confirm to the board that they do not intend to make an offer by 5.00 p.m on July 25.
Sanjuro United, a consortium comprising four entities have made a 40 cents offer per share for Hwa Hong on June 7, which was 8.11% better than the original 37 cents offer. On June 22, a circular with the voluntary general offer of 40 cents was sent to shareholders. On June 8, Hwa Hong announced that Sanjuro's offer is a mandatory general offer (MGO) as acceptances and purchases from the market coupled with Sanjuro’s stake crossed 30%.
Based on the fee structure in the June 22 circular, we assumed that any competing offer would need to be better than 40 cents. "According to the offer circular, Evercore is likely to be paid on a success basis should it obtain a better offer for shareholders and the fees involved are likely to have a negative impact on the current 40 cents offer price," we had said. Evercore Asia is the financial adviser tasked by the current Ong directors to undertake a strategic review of the company.
“As a result of the fees involved, IFA has indicated that estimated Adjusted RNAV of the Group as at 31 December 2021 will need to be reduced by up to approximately $0.0148 per share. Hence, any potential bidder looking to come up with an offer price will need to take into consideration the fees,” we had suggested. Based on the arithmetic, we had assumed any competing offer would need to be above 41.5 cents to make sense to shareholders.
The current Ong directors of Hwa Hong point out that the circular did not state that the financial adviser’s (FA) fees would or are likely to have a negative impact on the revised offer price of 40 cents; they have said that the fees would be borne by the company.
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Provenance Capital, the independent financial adviser (IFA) to the Hwa Hong board said: "We note that in the event the offer becomes unconditional in all respects and the above estimated expenses of not more than $9.66 million are incurred, such expenses may have a material and adverse impact on the financial performance of the group for the current year, FY2022, and on the … estimated Adjusted RNAV of the group as at 31 December 2021 by a reduction of up to approximately $0.0148 per Share.”
Success fee
According to Hwa Hong’s latest announcement on July 19, Evercore will be paid a success fee if any offer for Hwa Hong either from Sanjuro or a competing offer goes unconditional. No fees are payable to Evercore if any offer - either from Sanjuro or a competiging offer - is not unconditional.
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Hwa Hong’s announcement on July 19 says “The fee structure was intended to create a level playing field for all bidders and differentiating fee structures would have created an unfair advantage for the offeror. The fee structure could not be designed to create an advantage to one bidder over another, or in this case to the offeror versus any other potential interested party.”
The July 19 announcement provides details of the fee structure. “The actual amount of the FA Fees payable by the company to Evercore will depend on the aggregate value of the consideration received by shareholders from the relevant offeror as at the close of the relevant offer,” the announcement says.
In the case of the Sanjuro offer, based on the Revised Offer Price of $0.40 per Share, the FA Fees will range from approximately $4.2 million to $8.4 million (in each case, including GST) and if a competing offer emerges between $0.40 and $0.50, the range of FA Fees would be correspondingly adjusted, the announcement says.
The July 19 announcement also points out that the current Ong Directors, who are themselves shareholders, believed that the likelihood of the original Sanjuro offer becoming unconditional as to acceptances was remote. “This is supported by the fact that: (i) the Original Offer Price of $0.37 per Share falls outside of the IFA’s estimated value range of between $0.40 and $0.43 per Share, and as such would have been inadequate and incapable of being recommended to Shareholders; and (ii) the Sanjuro Offer was unlikely to receive the necessary level of acceptances given the shareholding structure of the Company," the announcement says.
The announcement adds that that at the point of Evercore’s appointment, Sanjuro and its concert parties owned and controlled only 24.38% of the shares, while 34.57% of the shares were held in public hands, with the remaining 29.26% of the shares held by the current Ong Directors and their immediate family members.
The current Ong directors believe that the competitive tension generated from the announcement of Evercore as the company’s financial adviser and Evercore commencing a targeted and intensive exercise were the key considerations which caused the share price of the company to trade beyond the Original Offer Price, which in turn created the impetus for an increase in the Original Offer Price from $0.37 per share to $0.40 per share.
Hwa Hong’s share price last traded at $0.40 as at July 18.
