Is Zero Premium to Privatise YTLE Fair?

This article first appreared in The Edge Malaysia Weekly, on August 1 - 7, 2016.

http://www.theedgemarkets.com/en/node/295784

WITH its paper-thin trading volume and low investor interrest, it is only a matter of time before YTL-eSolutions Bhd is taken private. But YTL Corp Bhd is not paying a premium to tak full control of its 74.12%-owned subsidiary, offering only 55sen a share of it.

Not surprisingly, minority shareholders are less than pleased with the offer. After all, YTL e-Solutions is cash rich and has a virtually guaranteed income stream. The recently launched 4G LTE network by YES is also expected to benefit the company.

YTL e-Solutions holds the licence for the 2,300Mhz spectrum that is leased to YTL Communications Sdn Bhd, which is in turn wholly owned by YTL Power International Bhd.

Nonetheless, YTL Corp executive director Datuk Yeoh Seok Hong asserts that the offer is equitable.

"I think it is a fair offer. We are offering market price for the shares and we will be giving shareholders shares in YTL Corp. They (minorities) will continue to be part of the YTL family while enjoying better liquidity (exactly the same excuse used for privatisation of YTL Cement during 2011) , " he tells The Edge.

The privatisation offer will not be settled with cash but with YTL Corp shares. For every YTL e-Solutions share, shareholders will receive 0.333 YTL Corp share based on an issue price of RM1.65.

But is paying market value a "fair offer"if YTL e-Solutions at 21.3 times earning. At face value, this is decent, given that the company is not an earnings growth stock.

However, YTL e-Solutions is not favoured for its growth but for its steady earnings. It generates the bulk of its income from leasing the spectrum to its sister company - about 81 million a year. This is seen as a low-risk business since the operational risks are borne by YTL Power, which at same time is good paymaster for YTL e-Solutions.

Coupled with steady dividend payments, YTL e-Solutions is a relatively attractive value proposition for shareholders.

The company paid out a dividend of four sen per share in the past two years, giving it a yield of 7.27%. This is lucrative in the current yield environment but also involves a high dividend payout ratio of 155%.

YTL e-Solutions had priviously paid a dividend of 2 sen per share each year.

The company is more than capable of paying higher dividends, given that is is sitting on a cash pile of RM173.5 million. This means some 91.3% of the company's net assets in cash or 12.9 sen per share. Stripping out the cash, YTL e-Solutions would be valued at 16.32 times earnings or 42.1 sen per share.

With the launch of YES'4G LTE service, is there upside potential for YTL e-Solutions'earnings?

"Not directly (only Wimax revenue because spectrum owned by YTLE currently use for Yes Broadband & lucrative 1Bestari project as per spectrum leasing contract)," says Yeoh, who remains tight-lipped on the take-up of the service, saying an annoucement will be made at the appropriate time.

"YTL e-Solutions leases the spectrum to YTL Communications on a fixed basis. YTL Communications will enjoy all the benefits if the LTE service does not well, not YTL e-Solutions," he adds.

He qualifies, however, that YTL e-Solutions also provides other services to YTL Communications and will benefit if the latter grows and performs well.

Coming back to the offer, it appears to be a good deal for the acquirer, YTL Corp. Buying outstanding shares in YTL e-Solutions will allow it to gain full access to the company's cash.

The benefit for YTL e-Solutions'minorities is less obivious (because it is a rip off). Right now, they enjoy a dividned yield of 7.27% but after swapping for YTL Corp shares, the dividend yield will fall to 5.69%.

However, Yeoh argues that is it is a win-win situation (bluffing...only always big WIN for YTL family, infact minorities only need fair treatment).

The privatisation of YTL Cement Bhd shows the minorities benifited, as will the privatisation of YTL e-Solutions?

Recall that when the offer was made in late 2011, YTL Cement's minority shareholders had also voiced thier displeasure over the offer price. They were only offered a nominal premium and YTL Corp shares instead of cash. While it is not clear what the prospects are for YTL e-Solutions, in hindsight, it is clear that YTL Corp's shareholders benefited from the privatisation of YTL Cement.

The company was taken private just as the constuction boom began. Its revenue has incresed 24.2% while profit before tax has risen 25.6%.

In contrast, the total return for investing in YTL Corp over the same period has only been 19.5% assuming dividends were reinvested in the stock. This is not too shabby but substantially lower than the 25.6% earnings growth YTL Cement has enjoyed. This also does not take into account the 2.92%  dividend yield thatYTL Cement was paying when it was privatised.

Assuming the dividend payments remainded unchanged, conservative back-of-the-envolope calculations show that the YTL Cement's return to shareholders would have been 36% if it had not been privatised. The assumes YTL Cement's PER remainded unchanged at 9.2 times. In contrast, fellow cement-maker Lafarge Malaysia Bhd is currently trading at PER of over 30 times.

Still, if history is anyting to go by, YTL Corp is likely to get its own way. This time around, it only needs to acquire 25.88% of YTL e-Solutions' outstanding shares compared with YTL Cement's 47.22% back then.

YTL e-Solutions' market capitalisation is also smaller at RM726 million compared with YTL Cement's RM2.14billion at the time.

Interestingly, it will take a lot less to block the privatisation of YTL e-Solutions. At least 10% of the minorities need to reject the offer to block compulsory acquisition of the outstanding shares. Hence, a mere 2.6%block of shares would be enough to thwart the takeover.

But looking at the YTL e-Solutions' fragmented shareholder list, this is unlikely to happen (unless most of the minorities reject the take over offer by holding the shares tight, including the institutional shareholders ). It appers that once again, YTL Corp's shareholders will get the better bargain in this privatisation exercise.

YTLE Minority (mighty) Shareholder:

If you think the offer for take over by YTL Corp is unsatisfied, somehow unfair, could be a better....the must do is:

''YOU DO NOT NEED TO TAKE ANY ACTION SHOULD YOU DECIDE NOT TO ACCEPT OFFER''

Related links:

http://www.bursamalaysia.com/market/listed-companies/company-announcements/5176693

http://www.ytlesolutions.com/about_ymax.asp

http://www.yes.my/what-we-do#onebestarinet