This article first appeared in The Edge Malaysia Weekly on May 13, 2024 - May 19, 2024

TWO days can mean a lot in the world of high finance. The minority shareholders of Kuchai Development Bhd (KL:KUCHAI) learnt this the hard way.

Last Tuesday, the shareholders of Kuchai approved a transaction to dispose of all the assets and liabilities in the company to Sungei Bagan Rubber Co (M) Bhd (Sg Bagan) (KL:SBAGAN) for RM275.5 million. Kuchai’s disposal does not include its cash of RM83.8 million. 

In return, Kuchai would get 27.5 million Sg Bagan shares issued at RM10.01 each. The block represented a 29.37% stake in Sg Bagan’s enlarged share capital.

The most valuable of Kuchai’s assets is a block of 3.032 million shares in Singapore-listed Great Eastern Holdings Ltd, the largest insurer in the region.

The other assets are a two-storey corner shoplot in Singapore valued at S$16 million (RM55 million), two parcels of land in Semenyih tagged at RM7.8 million and corporate bonds estimated at RM21 million.

When Kuchai’s shareholders gave the nod for the deal on Tuesday, the block of Great Eastern shares was valued at RM184.8 million.

However, two days later, Oversea-Chinese Banking Corp Ltd (OCBC), which already had an 88.45% stake in Great Eastern, made a general offer to mop up the rest of the 11.56% it did not own in the insurance company at S$25.60 per share.

Assuming Kuchai had held on to the block, the 3.032 million shares alone would be worth an estimated RM271.7 million (S$77.6 million).

Which means Sg Bagan had got the land and other assets from Kuchai for almost nothing. And its shareholders would also get to enjoy a re-rating of the company following the deal across the causeway.

“If the shareholders’ meeting had been held just a few days later after OCBC’s mandatory general offer for Great Eastern, surely the minorities of Kuchai would have voted down the deal. This is because they would have got a larger chunk of Sg Bagan instead of 29.37%,” says a shareholder.

Both Kuchai and Sg Bagan are plantation companies. But the real value in both of these listed companies are their shares in Great Eastern. Based on Great Eastern’s annual report, Kuchai is the fifth-largest shareholder while Sg Bagan is the eighth in the list with 1.733 million shares.

Both Kuchai and Sg Bagan are controlled by Kluang Rubber Co (M) Bhd (KL:KLUANG) which, in turn, is controlled by Singapore-based The Nyalas Rubber Estates Ltd.

Nyalas is the private vehicle of Lee Thor Seng, who is related to the Lee family of Singapore that is the major shareholder of OCBC. Nyalas itself is the second-largest shareholder of Great Eastern after OCBC with 4.014 million shares.

Following OCBC’s announcement of the general offer for Great Eastern, the share price of Sg Bagan rose as much as 76 sen or 15.29%. This is on account of Sg Bagan now owning 4.763 million shares in Great Eastern, which have a market value of S$121.93 million or RM426.88 million based on OCBC’s offer price.

Should Sg Bagan take up the offer, the estimated proceeds from the transaction would be more than the company’s market capitalisation, which had stood at RM371.46 million last Friday. In fact, the proceeds from the acceptance of the offer would translate into Sg Bagan having a cash backing per share of RM4.56.

Following the disposal of assets and liabilities, Kuchai shareholders also approved the distribution of the Sg Bagan shares to shareholders. This would pave the way for Kuchai shareholders to own the Sg Bagan shares directly.

Kuchai’s distribution exercise would result in Kluang Rubber increasing its equity interest in Sg Bagan from 30.72% to 43.12%. Lee’s Nyalas is the major shareholder of Kluang Rubber with a 44.39% stake.

As for the minorities of Kuchai, they would be left with a 13.98% stake in Sg Bagan after the distribution (see Chart 2).

A shareholder of Kuchai says the timing of the Great Eastern offer that came just two days after the Kuchai shareholders had approved the deal was a loss of opportunity for the company’s minority shareholders.

“For years, Kuchai shareholders had held on to the shares with the view that Great Eastern would be privatised eventually. This was on the account that the shareholders of Great Eastern were already clamouring for the board to take action to enhance shareholder value.

“When OCBC finally made the general offer for Great Eastern, the upside directly benefits Sg Bagan shareholders,” says the shareholder.

Signs of OCBC taking some kind of action to enhance value in Great Eastern emerged in March this year. This was following a letter from a shareholder to the board of Great Eastern proposing, among others, to withhold a portion of directors’ fees and appoint a financial adviser to explore ways to enhance the value of Great Eastern.

The major shareholders of Kuchai, which are Nyalas and the Lee family, are not impacted by the timing of OCBC’s offer to Great Eastern. This is because their controlling interest in both Kuchai and Sg Bagan is via Kluang Rubber.

In fact, the developments related to Great Eastern leave Sg Bagan as a company with cash and property assets.

As for Kuchai, it will eventually be a shell company with cash of RM83.8 million. 

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