This is my follow-up article on my previous article “Stay away from SONA WA and it's high time for SPACs to consider its future in Malaysia”

I really don’t like focusing on just one topic but since there are a lot of interest and this could affect the other SPACs as well, I will write another piece (hopefully the last piece) on SONA.

Drama in EGM offers exit route

By now you should know that the EGM is adjourned and will only happen within the next 30 days.  In my opinion, this is the last period for SONA warrant holders to exit at a decent price.

Planned adjournment

Let’s be frank, announcing a proposal for capital reduction (provided QA succeed) on last Friday was way too late.  One couldn’t help but suspect if the management, from the votes they have received before the EGM, already knew it was a lost cause.  So by announcing it late and adjourn the EGM by claiming that shareholders need more time to consider, they buy themselves another round of voting (since they are gonna lost the initial round anyway)

It’s like playing video games with your sibling. When they are about to lose, they would just hit the restart button. There’s no guarantee that they could win after it restarts but they know if they carry on, they will lose.  But it annoys and frustrates you to no end. Thankfully I am not one of the shareholders who made it all the way to the EGM just to witness this fiasco.

SONA WA survive for now but for how long

There were much optimism among the WA holders after this adjournment.  They are now claiming the QA will go through but sadly, I still think the QA will FAIL.  Warrant holders are thinking from their perspective when in actual fact they should be thinking from the mother shares’ shareholders’ perspective (since warrant holders have no right to vote). And from the shareholders’ perspective, the odds of QA going through has not changed.

Capital reduction changes nothing

If the management thinks that capital reduction could be a game changer, sorry to bust their dreams but it’s not happening.

The group of investors that the management are targeting are those that that are likely to vote NO in the EGM, who are mainly institutions/retail investors that are targeting their cash in the trust account. Why would they want that 7c when they could have access to 48c instead?

Imagine if your ancestors left you a RM48m trust fund that is maturing soon and you have been waiting for a few years to tap that whole amount, suddenly your trust fund manager came up to you and say please let us manage your money for a few more years to grow it (and after that half of the trust fund will be shared with other distant relatives).  In the meantime, I will be nice and release RM7m back to you.

I don’t know about you but depending on my mood, my reaction would range from asking him to go fly a kite or meaner words.  It’s my money you are talking about, don’t sound like you are doing me a favour.

I know some of you may be wondering, what about the management then? Have we consider their efforts, their feelings? Sadly, from the first day of listing, the company legally belongs to shareholders now, not management.  Are shareholders’ interest and company’s interest always align? Definitely no, but unfortunately in capital market’s term, shareholders’ interest need to prevail (that’s a topic for another day).

Institutional investors are the key

There is no doubt that to garner 75% vote for is a high hurdle.  There is little room for error. If the institutional investors vote no, it’s game over. Even if they vote yes, the company still has to convince the remaining skeptical shareholders.

My guess, institutional investors will still vote NO. Why? Please refer to my previous article where I have already detailed my reasoning.

Who will vote YES then

Of course there will be groups who would vote YES. 

They are mainly those that:

(i) are related and aligned to the management; or

(ii) owns both mother share and warrants; or

(iii) claims or are genuinely in for the long term prospect

The first category of course is biased.  Second category are emotionally bias as well as they are voting yes because they know if QA fails, part of their holdings will die.  It is not a rational decision if they vote YES mainly to preserve their warrant.  However, by voting YES, you exposed your mother shares instead. I will show you why in the section below.

The third category is controversial.  Everybody is entitled to their own view. But my view has always been that SPAC’s long term future is bogged down by the huge number of shares and warrants. The details again you can see in my previous article.  If you are positive on oil and gas long term, there are plenty of oil and gas counters who are now much cheaper in terms of valuation (thanks to the crude price).  Is it wise to stick with SONA?

Reap what you sow

Here’s what you can get from SONA for different scenarios (depending on your actions)

If QA fails:

Shareholders’ who vote YES: You are entitled to about 48c liquidation value or you could sell it at open market until delisting (likely to be capped at 47.5-48c)

Shareholders’ who vote NO: You are entitled to about 48c liquidation value or you could sell it at open market until delisting (likely to be capped at 47.5-48c)

Warrant holders: Sadly it’s the end of the road, you will be lucky to get 0.5c

If QA succeeds:

Shareholders’ who vote YES: You are not entitled to share repurchase but could sell it at open market

Shareholders’ who vote NO: Your shares will be repurchased by the company at around 48c after the QA is completed

Warrant holders: It’s the best case scenario for you.  As now the warrant is trading at a discount (exercise price is 35c), if QA succeeds, discount should narrow but the key factors remains - the mother shares’ price

How will mother share move after EGM

For failure scenario, the outcome is simple and straightforward.  Shareholder’s get back their 48c and warrant holders get nothing. Company close shop and everybody move on. But if it succeeds, all valuation parameters will change.

If you did not vote NO during the EGM, you are no longer entitled to the share repurchase provision and you no longer have access to the cash in the trust account. In other words, there is no longer a FLOOR in the price for the mother share. The market would start to value SONA as an O&G company with an oilfield in Australia.  Is it still worth 45c and above? That depends on your valuation. Could it drop below 40c or even 30c? My answer is why not. You can’t touch the cash anymore, the arbitrage window is closed and if market values O&G counters at such low PE and PB right now, why should SONA be any different? By voting QA through, you might save your warrants but kill your mother share instead.

My conclusion, SPACs, barring arbitrage opportunities, are poor investments, likewise with their warrants, regardless if the QA passes or fails.

# While the author understands the management is simply doing this to avoid the end of their career, he felt for those who spent time and cost to make it for the EGM, just to realise they will not get an answer or conclusion. The same frustration he felt when he watched the Hobbit 1 & 2.