Published July 28, 2009

AWT: cooperate for a win-win outcome

By OH BOON PING

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FOR minority shareholders, there's nothing better than a tussle for control of their shares as it often unlocks value and raises the stock price to levels it would be unlikely to reach under normal circumstances.

But this is certainly not true in the case of troubled Asia Water Technology (AWT), which found itself caught between a rock and a hard place.

To recap: the waste water specialist, saddled with debts of over US$30 million, got into trouble when it missed repayment of a US$2 million second bond redemption on March 31.

To avert a liquidation of its business, the management struck a deal with China-based SI Infrastructure, which agreed to subscribe up to 1.67 billion new shares, and participate in a rights issue of 98.45 million new shares at an exercise price of two cents apiece.

This represented a 77.8 per cent discount to its last traded price of nine cents before the bailout agreement was announced on June 16.

Indeed, substantial shareholder Kareti Venkataramana, who owns some 22.85 per cent in AWT through his vehicle EGN Nominees, opposes the bailout package, citing the steep discount at which new shares will be issued, adding that this bodes ill for existing shareholders.

'The funding proposed will erode virtually all of the share value of the current shareholders of the company,' EGN said in a June 25 letter to AWT's directors.

On his part, Mr Venkataramana has offered to mount a takeover of AWT, if necessary, adding that existing bonds can be redeemed by raising funds through a new bond issue, an issue of new shares at market price and a review of assets to see what can be sold.

In addition, EGN also called for the resignation of four AWT directors, and proposes the appointment of Mr Venkataramana as a non-executive director and HML Consulting Group chairman Peter Lai as an independent director.

Although it is uncertain if EGN's tussle for control will succeed, what is clear is that the continuing battle between the warring parties has heightened the market uncertainty over the counter and that bodes ill for minority shareholders who are caught between both parties.

To be fair, EGN's concerns are valid since a new share issue at such a steep discount will severely dilute the current investment value of existing shareholders.

Capital losses are almost certain, while AWT's prospects under SI are uncertain even if the SI deal comes with a potential slew of contracts in China - an emerging market where promising business deals may not always materialise.

Still, it is worth remembering that AWT has already defaulted on a bond issue and that, therefore, the bondholders have the right to force the company into liquidation and seize its assets.

One of the merits of the deal with SI is that it has the backing of the bondholders and, therefore, insolvency will be averted if the shareholders lend their support at an extraordinary general meeting.

For stockholders, this is surely better than having AWT forced into liquidation since, under that scenario, their shares will be rendered worthless.

Plus, if the deal is indeed shot down, the bondholders still reserve the right to sell certain AWT assets to SI Infrastructure for US$29 million.

These assets - which include 100 per cent of Asia Water Investments, 100 per cent of Wuhan Kaidi Water Services Co and 75 per cent of Wuhan Kaidi Water Projects and Engineering Co - contribute almost all of AWT's revenue stream, so a forced sale of those businesses will leave shares in AWT nearly worthless.

If EGN is serious about acting in the best interests of existing shareholders, then it should engage the existing bondholders and rope in the current management to provide a credible alternative to existing shareholders.

The stakeholders need to realise that cooperation, not confrontation, is the only way to a win-win outcome.