Penguin International

[ghchua]

Fellow ValueBuddies should take a look into the case of Lum Chang's failed privatisation exercise which closed on 18Jan21 at 79.22%, and the declaration of dividends totalling $0.05/share soon after on 9Feb21 in conjunction with the half-year results announcement. Those who did not accept the low ball offer at $0.38/share must be very happy now, as the share price hit a 5-year high of $0.46 today.

The same could well happen to Penguin, as the Offeror is likely borrowing to fund the privatisation exercise, and would have to tap Penguin's cash reserve to repay such borrowings. The value of Penguin is the underlying well-established business and its assets, including the cash reserve. Unless shareholders get a fair deal, many will choose to hold on to their Penguin shares.

Hi dydx,

I have taken a look at the Lum Chang case study and it is quite different from this Penguin one. 

Firstly, the Lum Chang offer is a mandatory cash offer triggered by the takeover code of the Companies Act. This one is a voluntary cash offer to start with, before becoming a mandatory one after they crosses 30%. 

Secondary, the Lum Chang offer had stated very clearly its intention from the start is to maintain its listing status. This one had stated its intention is to delist the company and exercise its rights of compulsory acquisition to make it its wholly owned subsidiary.

Why are the above two observations necessary to put things into perspective? This is because by inspection, the Lum Chang offer is not a privatisation offer to start with. So, one cannot say that it is a failed privatisation exercise. This Penguin one is certainly a privatisation offer. With different intentions, then we cannot do an apple to apple comparision on both cases and their offer price. The Lum Chang one is low ball to start with because they want to maintain their listing status.

[pianist]

First, if if you truly believe that a company is severely undervalued at $0.65, then my question is did you buy more of it before the offer was announced (i.e. when it was languishing at $0.40?). I'm quite confident majority of those complaining did not. So you don't buy more when it's even more undervalued, but now you complain that the offer is low ball.

There is such thing as unknown unknown. For example, in year 2018 or early 2019, no one knows what is Covid 19, or would have factor in such an event into their investment decision. As it turns out, Covid 19 created huge havoc and the effect is still being played out. So even if one knows that Penguin at $0.40c is an undervalued company, whether to buy more and how much more really depends on individual circumstances and individual outlooks of the future, taking into consideration factors beyond the control of the company. Not an easy things to evaluate, imo.

I did buy some more when Penguin was trading at 40c plus. Should I have bought more when the price was depressed? Of course I should, but that is on hindsight.

However, I have also let go of everything at the offer price of 65c. I made very nice profit from this counter over the years, and I shall move on to look for other more potential counters. Hopefully I can spot one like Penguin.

And that's exactly my point. Hindsight bias should not be a thing in our investment process.

So before offer was made = a lot of uncertainty so even at $0.40 it may not be a good deal - I am in this camp as well. My average price is $0.50, and I did not average down because of the uncertainty.

After offer was made = suddenly the offer is very low and minority shareholders got fleeced.

Fundamentally, nothing has changed about the business pre and post offer. But the behavior of minority shareholders has changed drastically.

6 Aug 2020 company announced Penguin’s core shipbuilding and crewboat chartering businesses have been negatively affected by the Covid19 pandemic and slumping oil prices. Demand for new vessels has weakened and crewboat charter rates and utilisation rates have fallen year-on-year. share price was 44cents, most investors would rationally have not bought more given such weakening business climate painted by the insider mgt and the last AR said they would pay a fair dividend and persevere like a penguin. And yet just a few months later, they teamed up with Dymon activity fund mgt firm for a buyout at 65cents, what does it says about their integrity?

latest fy showed an increase in administrative expenses for wages, bonus albeit a lower net profit and did not declare dividend for its long time loyal shareholders just because a dymon dances in

[dydx]

Hi ghchua,
Is there a need to be so technical in interpreting a GO and differentiating it between mandatory or voluntary? In both cases, whether the stated intention is to remain listed or privatisation, the Offeror just wants to buy up shares from the minorities for the cheap, for their own benefit!

Shareholders will have to evaluate and decide for themselves whether $0.65/share is fair and good enough to forgo their Penguin shares and the underlying well-established business and its assets including the cash reserve that the Penguin shares represent. If the Offeror has been borrowing money to pay for its open-market purchases since 22Jan21 and the Penguin shares tendered in by minorities in the formal offer, what happened in Lum Chang - i.e. paying out a big dividend after the offer - may well happen to Penguin as well.

[Reenat]

Hi ghchua,
Is there a need to be so technical in interpreting a GO and differentiating it between mandatory or voluntary? In both cases, whether the stated intention is to remain listed or privatisation, the Offeror just wants to buy up shares from the minorities for the cheap, for their own benefit!

Shareholders will have to evaluate and decide for themselves whether $0.65/share is fair and good enough to forgo their Penguin shares and the underlying well-established business and its assets including the cash reserve that the Penguin shares represent. If the Offeror has been borrowing money to pay for its open-market purchases since 22Jan21 and the Penguin shares tendered in by minorities in the formal offer, what happened in Lum Chang - i.e. paying out a big dividend after the offer - may well happen to Penguin as well.

If the offerors in Penguin get 100% of the company they can pay their borrowing by using the cash on hand.  It becomes their company and they can pay themselves a big dividend to cover their borrowing while getting a business concern that will be able to generate cash in the future.

In the case of LC, they did not get 100% thus had declared dividends to all existing shareholders in order to cover their cash flow to pay the shares bought.  Technically they got the shares from the market on the cheap and had an ongoing business to generate new cash going ahead.

[ghchua]

Hi ghchua,
Is there a need to be so technical in interpreting a GO and differentiating it between mandatory or voluntary? In both cases, whether the stated intention is to remain listed or privatisation, the Offeror just wants to buy up shares from the minorities for the cheap, for their own benefit!

Its not about me being technical here. Because mandatory means that you "die die" have to do a GO in order to be in compliance with the takeover code, whether you like it or not. In Lum Chang case, the GO is being triggered by the takeover code and not them being voluntary to low ball minorities. They could have just continue to buy Lum Chang shares in the market slowly rather than having to do a GO since their intention is to keep Lum Chang listed. With a GO, even if they hit 90%, they would need to sell out again to restore its free float to keep it listed.

And in Lum Chang case, if their intention is to buy up as many shares as they wanted for the cheap as you have stated, they could have extended the offer closing date a few times to get as much shares as possible. But they did not, closing the offer at the earliest date possible.

[ghchua]

In the case of LC, they did not get 100% thus had declared dividends to all existing shareholders in order to cover their cash flow to pay the shares bought.  Technically they got the shares from the market on the cheap and had an ongoing business to generate new cash going ahead.

As I mentioned in my reply to dydx above, it is not their intention to do this GO. It is mandatory, triggered by the takeover code and not voluntary. I apologize if I am being too technical here, but I need to differentiate these two GOs in order for me to explain better.

Since it is not their intention to do this GO but they have to do it, they might have gotten more Lum Chang shares that they have budgeted through the GO. Therefore, this dividend payout might be used to pay off some bridging loans that they could have secured during the course of the GO.

[dydx]

If the offerors in Penguin get 100% of the company they can pay their borrowing by using the cash on hand.  It becomes their company and they can pay themselves a big dividend to cover their borrowing while getting a business concern that will be able to generate cash in the future.

If the Offeror gets just between 33.74% (end of today's position) and 50% at the end of the GO, they get to keep only those Penguin shares they have bought from the open-market since 22Jan21, and soon they will have to think of ways to get money to reduce/pay off loans taken to fund the shares purchased in order to avoid paying too much interests. The easiest way is to tap Penguin's $40.0m cash reserve (as at 31Dec20) by way of a special dividend which has to be paid to all shareholders. Penguin will remain listed.

If the Offeror gets between >50% to <90% at the end of the GO, they get to keep all the Penguin shares bought, including those shares tendered in under acceptances of the formal GO. Soon the Offeror will have to think of ways to get money to reduce/pay off loans taken to fund the shares purchased in order to avoid paying too much interests. The easiest way is to tap Penguin's $40.0m cash reserve (as at 31Dec20) by way of a special dividend which has to be paid to all shareholders. Penguin will remain listed.

If the Offeror gets >90% at the end of the GO, they would exercise their rights under Companies Act to compulsorily acquire the remaining shares to achieve 100%. After which, the Offeror will likely upstream all of Penguin's cash reserve plus appropriate new borrowings by way of dividends or inter-company loans to reduce/pay off loans taken to privatise Penguin.

In all the 3 possibilities above, Penguin's cash reserve will be the main source of repayment for the Offeror's borrowings, and Penguin would end up paying out large dividends after the GO.

[lonewolf]

Your 3rd scenario is incorrect.  >90% only means they can delist the shares. They can only compulsorily acquire the remaining shares from dissenting shareholders if they get 92.2%.

Why 92.2%? Read my post here where I break down all the numbers.

So this means the offeror get between 90 - 92.2%, they can delist Penguin but not compulsorily acquire the remaining shares.  

This is exactly what happens during CK Tang's PO. The offeror got enough to delist but not enough to compulsorily acquire the remaining shares. It was years later before an offer was made to the dissenting shareholders (it was a much higher offer) and the Tangs brothers managed to buy back the remaining shares.

Personally, I won't bother with all the hassle. As with all PO, I will usually not tender my shares unless the 90% level is breached. 

In this exercise, I doubt the acceptance level will be anywhere near 90%. I think it would probably clear 50% to make the offer unconditional. But I will be surprised if they end up with more than 65%.

[ghchua]

Hi lonewolf,

My view is that dydx's interpretation of 3rd scenario in this case is correct. It is different from the CK Tang PO, as in this case, the offeror is using a new vehicle to do this GO, so we should count the 21.56% stake that the controlling shareholders owned towards the 90% required for compulsory acquisition, and not exclude it.

Because in this case, Fairy (the offeror) owns 0% of the outstanding shares out there to start with when they made this offer.

[lonewolf]

My interpretation is that both Jeffrey and James (which held the 21.56% of the shares and has given the undertaking to tender the shares for the offer) are acting in concert with the Offeror and has hence should not be excluded in the calculation.

But reading the document again, there was no mention of 'working in concert' for compulsory acquisition, so you may be right.