Published July 15, 2009

Is Evergro deal the best for all parties?

By CHEW XIANG

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KEPPEL Land's proposed delisting of Evergro Properties, its China unit, is great news for Evergro's shareholders. On Sunday, they were offered 29 cents a share, a 16 per cent premium over Evergro's traded price of 25 cents last Friday. Or, they could have taken one Keppel Land share (worth $2.09 yesterday) for every seven Evergro shares they own ($2.03 in cash, at 29 cents apiece). Whichever way you look at it, it's a good price for a stock that in the past 12 months has seldom breached the 20-cent mark.

Analysts agreed. 'We implore Evergro shareholders to take up Keppel Land's exit offer,' DMG analyst Brandon Lee said in a note on Monday. Mr Lee cited the thin trading volume - just 50-80 lots a day in the last 3-6 months - and the fact that 25 cents was also the stock's 52- week high.

And it's not as if holding Evergro stock has been rewarding. Net profit was just $545,000 last year, or 0.07 cent on a per-share basis. No dividends were declared and return on equity was just a fraction of a percentage point (compared to an annualised 6 per cent for Keppel Land in Q1 2009). Net assets were $211.6 million last year, and rose slightly to $215 million on March 31. On that date, Evergro held cash and deposits of $134.7 million.

The present exit offer will leave Keppel Land with a company with net assets of just under 17 cents a share and earnings of 0.03 cent. It will also return some $80 million cash to Keppel Land, after deducting $53.8 million from the hoard if all minority shareholders choose payment in cash.

It's a good deal for the minorities; conversely, shareholders of Keppel Land can find cause for unhappiness. Those numbers show poor use of shareholders' funds (especially the dismal ROE figure) and a good chunk of those funds came from Keppel Land, as a result of a 3-for-2 rights issue by Evergro at 18 cents a share last August that raised $137 million. Keppel Land had to subscribe for 721.7 million rights shares - above its entitlement of 543.7 million shares, determined by its 71.4 per cent share of the company. That means it put in $129.9 million - 95 per cent of the total sum raised - and that took its share of the company up to 85.4 per cent, post rights.

The plan then was to spend about $95 million to buy land for business purposes, $16 million to improve a golf course in Tianjin, and $23.4 million for working capital. But so far, just $15 million has been used.

With hindsight, the Evergro rights issue was probably not needed. In June, Keppel Land itself had to raise $708 million in a 9-for-10 rights issue, priced at a massively diluting 42 per cent discount to the market. An extra $129.9 million in Keppel Land's hands would have come in handy, perhaps even afforded it room for better pricing; instead, all that cash was stuck in the balance sheet of Evergro, which didn't make much use of it anyway.

If, instead of a rights issue, Keppel Land had simply made an exit offer then of, say, 25 cents a share - a slight premium to the then prevailing price - it would have paid just $36.3 million to buy up the 29 per cent of the company it didn't then own (even paying 30 cents a share would have meant a total of $43.6 million). It would have saved Keppel Land $17.5 million; the many Evergro shareholders who refused to take up rights shares would not have had their stakes diluted; and Keppel Land would have been able to exploit the synergies of 'combining the operational expertise, industry knowledge and extensive networks of both companies' nine months early.

Of course, that's all with hindsight. Given what has happened, the exit offer is the best thing that could have happened to all parties involved.