Hovid Bhd: Potential coattail gains? (2)

Hovid Bhd major shareholders, holding close to 80% of stake in Hovid Bhd, had launched a corporate action seeking to delist Hovid Bhd with a similar exit offer of RM0.38 per share compared to its 1^st attempt at taking the company private.

EGM vote outcome due back in 15 November 2018 shows the final verdict being Hovid taken private, thus closing the potential coattail gains deal as highlight by yours truly back in June 2018.

Note: This is not an investment advice. Buy and sell any securities at your own risk.

Disclosure: None.

Kretam Holdings Bhd: Potential MGO arbitrage gains? (2)

Yours truly had previously profiled Kretam Holdings Bhd which may be an attractive MGO arbitrage gains play.

The worst possible outcome has occurred for risk arbitrageurs in Kretam Holdings Bhd where due diligence results were not acceptable to the buying party, Hap Seng Plantations and share sale agreement was terminated with immediate effect.

Prices of Kretam Holdings may fall back to pre-share sale agreement levels or even lower due to perceived weakness from adverse due diligence results. This ends any remaining chance of potential risk arbitrage gains.

Note: This is not an investment advice. Buy and sell any securities at your own risk.

Disclosure: None.

Kretam Holdings Bhd: Potential MGO arbitrage gains?

On 21 February 2018, Hap Seng Plantations (HSP), a bursa listed plantation company announced that a share sale agreement was entered between the major shareholder of Kretam Holdings Bhd and the company to purchase a combined stake of 55% share in Kretam Holdings Bhd. Completion of the share deal would see Hap Seng Plantations extending a mandatory general offer for all remaining 45% share stake in Kretam Holdings Bhd, where investors are able to sell their shares at the offer price of 92 sen per share without restriction to HSP.

Several conditions are required to be fulfilled, namely Hap Seng Plantations shareholder approval for the share purchase.

Currently the company is undertaking due diligence exercise on Kretam Holdings, and extension has been sought for finalization of due diligence.

The delay in completion of due diligence has made investors jittery, fearing that a deal could not be reached and slashing any hopes for an MGO to buyout all other shareholders at 92 sen offer price. Sharp selldown was seen on 4 June 2018, where prices plunged 20% to close at 62 sen per share, a huge 48% discount from the offer price. Prices rebounded slightly to close at 66.5 sen per share the next trading day on 5 June 2018 after clarification was made to the media that due diligence exercise is still ongoing.

Should the deal is officially cancelled, prices could plunge further to its 52 week low of 52 sen per share a strong support where its price has been hovering above these levels for whole of 2016 and 2017, a 23% loss from current share price. Investors could potentially benefit on the upside of ~40% as any deal is very much alive currently.

Final thoughts:

Pros: Reward to risk ratio of ~2:1, large upside gains of ~40% for a deal that could work out in 6 – 12 months.

Cons: Extension of timeline for deal completion, adverse findings in due diligence results resulting in lower offer price or total cancellation of share sale agreement.

Note: This is not an investment advice. Buy and sell any securities at your own risk.

Disclosure: None.

KAF Seagroatt-Campbell: Risk Arbitrage or Reverse Risk Arbitrage?

KAF Seagroatt & Campbell Bhd (KAF) (Stock Code 5096) listed on Bursa Malaysia has an impending corporate action where 76.74% of the listed entity shares will be acquired by KAF Investment Bank Berhad (KAF IB). Upon completion of the share sale agreement with KAF IB fully owning 76.74% of KAF shares, a mandatory general offer (MGO) will be triggered which gives other KAF shareholders an option to sell back your shares to KAF IB at a price of RM2.70 per share.

Based on the current ask price of RM2.51 per share (where shares can be bought immediately from a willing seller/sellers), there is a potential risk arbitrage gains of 7.5% in less than a year. However, this is subject to share sale conditions being fulfilled which will result in KAF IB gaining ownership of 76.74% equity interest in KAF.

As at 22 February 2016, the share sale conditions have not been fulfilled, after several announcement to extend the period of fulfillment of the conditions, hence delaying the trigger of MGO. On 22 Feb 2016 itself, a 3^rd announcement was made to Bursa that the period for fulfillment will be extended for another 3 months (90 days). The discount between the share price and MGO offer price has also widened since the announcement of the offer, hence giving market onlookers looking for risk arbitrage a chance of profit should they be confident in their assessment of the conditions successfully fulfilled and paving way for an MGO.

The final hurdles (share sale conditions) going against the deal may be the regulator’s stamp of approval, namely Bank Negara approval for KAFIB to purchase a securities broker KAF and Securities Commission approval on any change in shareholdings in the listed entity KAF. Should these 2 conditions fail to pass, there may be temporary roadblock to the MGO.

Final thoughts:

Pros: Potential attractive risk arbitrage returns of 7.5% in less than a year.

Cons: Continued delay in fulfillment of share sale conditions, lockup of excess cash in this risk arbitrage deal, total cancellation of share sale agreement and MGO, resulting in share price plunge below current levels.

Note: This is not an investment advice. Buy and sell any securities at your own risk.

Disclosure: None.

Side note: The continued delay highlights one of the key risks for those looking to profit through risk arbitrages deals involving listed securities. Excess cash may be lock up for longer than expected periods, or you may be forced to cut loss for a better investment opportunity. For those looking to spice up their returns using share margin financing, your interest cost on borrowed funds will be ticking up as the days and months goes by, hence reducing the profit margins.