Published February 6, 2009

Is Lexicon's RTO with Zenna really a good deal?

By OH BOON PING

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ON Wednesday, Singapore- based publisher Lexicon Group said it would pay $160 million for Zenna Overseas Ltd, which is engaged in commercial property development in China.

A reverse takeover, the deal will see Lexicon issue some 800 million new shares to the vendor at 20 cents a share for a slice of the property business in China.

For Lexicon, formerly known as Sun Business Network, the move comes at a time when a slowdown in its publishing business looks likely.

For the half-year ended Sept 30, 2008, the firm bled some $2.8 million, even though publishing sales rose by a marginal 3.4 per cent to $2.76 million. The group also reported losses of $42.67 million for the year that ended March 31, 2008.

In contrast, Zenna is the holding company of Taihe Development, which is engaged in developing and investing in commercial properties in China's Hunan province, including a commercial mall, Yueyang Taihe Commercial Plaza, and the 550-room Yueyang Taihe Hotel, and there is also a profit guarantee of $20 million per year on the assets for FY08, FY09 and FY10.

However, the acquisition deal also raises a number of questions which need to be addressed.

First, Zenna was previously the target of a takeover bid by Iconic Holdings which offered some one billion yuan (S$221 million) - to be satisfied by a share issue at 20 cents apiece - late last year. But that proposal was called off later when the deal failed to be completed within the stipulated timeframe.

Nevertheless, if we use the one billion yuan price tag as a benchmark, assuming the exchange rate at the time when Iconic announced its bid, it means Lexicon got a 24 per cent discount on the assets - a steal that's too good to be true.

Plus, the one billion yuan price tag was offered not too long ago, under very bad market conditions, and therefore the offered prices should not be too different - certainly not to the tune of a 24 per cent discount.

So this begs the question: If the business is really worth that much, why didn't the vendor ask for a higher sale price? Or is it because prospects in the property market there are worsening?

Indeed, the decision comes at a time when industry watchers see the outlook for property development in China looking increasingly bleak, while construction of homes, offices and factories in some cities fell at least 16.6 per cent last October.

Secondly, Zenna is a relatively new company with little track record, given that it was incorporated only in 2007.

True, it owns attractive assets such as the Yueyang Taihe Commercial Plaza and a hotel, located in the fast-growing Yueyang area, plus rights to development projects in Changsha, Hunan. But it is also clear that Lexicon is essentially placing its bets on the long-term prospects of Hunan - a move that may prove to be costly if economic development there slows sharply in the months ahead.

Plus, doing business remains risky in emerging markets such as China, where property ownership laws are often opaque and not easily understood.

On paper, Lexicon's reverse take- over deal appears to be a step in the right direction for the group, but much uncertainty remains over the prospects of its new venture.