High risks, High returns mate... caveat emptor
http://infopub.sgx.com/FileOpen/AVT-Resp...eID=288633
Published March 27, 2014
HOCK LOCK SIEW
Addvalue deal: do the values add up?
By R Sivanithy AND cai haoxiang
sivan@sph.com.sg
haoxiang@sph.com.sg
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If ever there was an example of a corporate development that was a candidate for a Trade With Caution (TWC) notice from the Singapore Exchange (SGX), it is Addvalue Technologies' latest announcement - PHOTO: SPH
Who exactly is the buyer and why would it pay the princely sum of $330m for a subsidiary of a company when that company, even after yesterday's massive share price rise, still only commands a market capitalisation of about $185m?
IF EVER there was an example of a corporate development that was a candidate for a "Trade With Caution" (TWC) notice from the Singapore Exchange (SGX), it is Addvalue Technologies' latest announcement. Addvalue said on Tuesday that it planned to sell its wholly owned subsidiary, Addvalue Communications (AVC), to a China buyer for an astounding $330 million in cash.
Since Addvalue's shares resumed trading yesterday following the announcement, its price has surged 9.4 cents or 149 per cent to 15.7 cents on heavy volume of 198 million shares traded. Clearly, the company has already gone a long way to achieving its goal of rewarding its loyal shareholders, an objective explicitly stated under its "rationale for the disposal".
Setting aside the bounty that shareholders are now enjoying, there are a few burning questions that have to be answered for the benefit of many sceptical observers. Who exactly is the buyer and why would it pay the princely sum of $330 million for a subsidiary of a company when that company, even after yesterday's massive share price rise, still only commands a market capitalisation of about $185 million?
Delve deeper into the numbers and more eyebrows are raised. First, AVC's net asset value (NAV) as at Dec 31, 2013, was about US$13 million, which means the buyer is paying an incredible premium of 1,883 per cent over the NAV.
Even more astonishing is that AVC's net tangible asset (NTA) value at end-2013 was about US$942,000, which means the purchase premium is 27,419 per cent of NTA.
By any standards, these are staggering numbers that beggar belief. Not surprisingly, in the absence of more information, many in the market are asking a) who exactly the buyer might be and b) whether the SGX should either ask the company for more details and/or issue its recently introduced TWC notice, until more details are released.
On who the buyer is, details are vague. Addvalue's announcement provides its name only in Chinese, saying its principal activities "relate to data security and related product development".
Going by hanyu pinyin, the name of the buyer translates to Tiancheng Hengsheng (Beijing) Technology Limited, an unlisted software and hardware development company.
But this is not conclusive. There is another company that shares the same Chinese characters and goes by the name of Secbase.
Secbase's website says it specialises in computer and network security, similar to the description given by Addvalue. Its products include data destruction systems, mobile terminal protection systems, army file protection systems, email security systems and secure login systems.
Secbase has an impressive customer list that includes Jiuquan Satellite Launch Centre, the Second Artillery Corps of China's People's Liberation Army (PLA), the PLA air force, China's Ministry of Foreign Affairs and China National Radio.
Addvalue last month announced that another wholly owned subsidiary, Addvalue Innovation Pte Ltd, was appointed by London-listed Inmarsat as a manufacturing partner for the latter's new maritime satellite service called Fleet One, aimed at the leisure maritime and fishing industry.
Based on these, market watchers say that since Addvalue and presumably AVC are involved in developing digital satellite technology, some premium is warranted. This is because there is growing interest in the technology and the associated intellectual property. The question, of course, is how much of a premium should be paid.
Addvalue said in its release that the price was determined based on an arm's length negotiation and on normal commercial terms using AVC's NAV, the fact that payment will be fully in cash, and that the initial 10 per cent deposit of $33 million is non-refundable, subject to certain, as yet, unspecified exceptions.
The rest of Addvalue's release also states that a commission of $15 million will be paid to an unnamed party who introduced the parties and brokered the deal. This party is described as owning less than 5 per cent of Addvalue, and is not related to the directors or substantial shareholders. Also provided are numbers to show the massive boost the deal would give to Addvalue's financials - if it goes through.
So, is a TWC warranted? SGX's actions over the past fortnight suggest that it only issues these alerts when the company has not made a material disclosure or replies "no" to a query as to whether it has yet to disclose material information. Since Addvalue has already made a significant announcement, this could explain the absence of a TWC on Addvalue's trading.
However, SGX should at the very least ask Addvalue for more information, such as the identities of the buyers and the unnamed broker. More details of what might cause the deal to be called off would also be useful.
It was not that long ago (2006-2008) that the local market witnessed several eye-catching, profit-guaranteed deals which involved enormous sums and China counterparties, none of which eventually materialised.
We are not suggesting that this same fate will befall the Addvalue deal but given the need for investors to tread with care, the exchange should consider issuing a TWC.
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