SUNNINGDALE Tech' s chairman Koh Boon Hwee and Novo Tellus PE Fund 2 on Tuesday raised their offer price for the precision plastic components manufacturer to S$1.65 per scheme share, up 6.5 per cent from S$1.55 previously.

 

The move comes after activist investor Quarz Capital Management said in a statement last week that the proposed takeover price was " too low" and " significantly undervalues" the company.

 

Quarz, which advises entities that collectively own more than 6 per cent of the shares of Sunningdale, argued that the initial takeover price proposed at S$1.55 per share is at a significant discount of more than 22 per cent to Sunningdale' s book value of close to S$2 per share.

 

With the revised and final offer, scheme shareholders can choose between receiving S$1.65 in cash per share, or 1,650 shares in Sunrise Technology Investment Holding (Cayman), the holding company of the offeror, at S$0.001 each.

 

Sunningdale and offeror Sunrise Technology Investment Holding said in a joint statement that the final offer of S$1.65 per scheme share represents a 42.6 per cent premium over the volume-weighted average price of the Sunningdale shares for the last year.

 

They also said the final offer provides a premium greater than any closing price of Sunningdale&rsquo s shares in the 12-month period prior to and including Sept 9, 2020 - the date the company announced a possible transaction involving its shares. 

 

The final offer also represents a premium ranging between 23.1 per cent and 120 per cent to the closing prices of Sunningdale&rsquo s shares in the same period, they added.

 

The offeror plans to delist Sunningdale should the scheme become effective and binding. Mr Koh' s entity, Sunrise Technology Investment Holding II, and a subsidiary of Novo Tellus PE Fund 2 hold a 64 per cent and 36 per cent stake respectively in the offeror company.

 

Mr Koh currently owns 15.61 per cent in Sunningdale. Yarwood Engineering & Trading, businessman Sam Goi, and chief executive officer Khoo Boo Hor have given an irrevocable undertaking to the offeror to vote in favour of the scheme. They hold a total of 18.1 per cent of Sunningdale in all.

 

Amid the global Covid-19 pandemic combined with US-China trade tensions, Sunningdale and the offeror said customers are managing risk actively by adjusting supply chains away from a concentrated production in Asia towards more diversified regional and local production worldwide.

 

The offeror is of the view that Sunningdale will need to make significant long-term investments to diversify and increase its manufacturing footprint beyond Asia - which will likely result in substantial upfront cash outlay that may generate little near-term payoff.

 

This in turn may increase the likelihood of more volatility to earnings and free cash flow generation over the near term.

 

As a result of the company' s changing risk profile, the offeror believes the proposed privatisation will allow the company the necessary flexibility to optimise its resources and allow it to make strategic, long-dated decisions to protect the long-term competitiveness of the business. 

Securing improved terms for minorities would be better outcome than voting down the whole deal

 

QUARZ Capital Management is at it again. Barely six weeks after winning a bruising battle to prevent Sabana Reit from merging with ESR-Reit on value-destructive terms, the activist investor has turned its sights on Sunningdale Tech - a precision plastic components maker in the throes of a private equity buyout.

 

Under the deal, which was announced on Nov 9, Sunningdale' s chairman and major shareholder Koh Boon Hwee has teamed up with a unit of Novo Tellus PE Fund 2 to offer minority shareholders S$1.55 per Sunningdale share.

 

In an open letter to Sunningdale' s board, Quarz grumbled that the deal is opportunistically timed - coming right after an extended period of heavy capital expenditure by Sunningdale that weighed on its profitability.

 

For 2019, Sunningdale reported a 43.3 per cent decline in core net profit to S$11.9 million on a 7.3 per cent fall in revenue to S$673.8 million. But its financial performance has been improving since.

 

For 9M2020, the company reported a 56.7 per cent jump in core net profit to S$10.7 million despite a 10 per cent slide in revenue to S$455.7 million.

 

Quarz said that the offer price of S$1.55 per share values Sunningdale at only 8.1 times its estimated earnings of S$36.5 million for 2021, and at a 22 per cent discount to its net asset value of S$2.00 per share.

 

Quarz went on to say that Mr Koh and Novo Tellus are capping the returns for minority investors with their offer, and privatising the substantial upside for themselves.

 

Quarz ended its letter by saying that it is " open for constructive negotiation with the bidder for a proposed takeover price in line with the intrinsic value of Sunningdale" .

 

It also warned that it may attempt to block the deal. " We are actively engaging with other shareholders who also share similar views that the current proposed price significantly undervalues Sunningdale," Quarz said.

 

" We have proven in the past that we will make good on our promise to vote down lowball proposals and that we are capable of uniting minority shareholders against hostile takeover offers well below book value," it added.

 

Quarz currently has a deemed interest in more than 11.56 million Sunningdale shares, or a more than 6 per cent stake in the company. Its last purchase was on Jan 8, when it scooped up 150,000 shares in the market for S$231,000 - or S$1.54 per share.

 

In its letter to Sunningdale, Quarz said it has been approached by similarly disgruntled investors who collectively hold 4 per cent of the company.

 

Private equity play?

 

Sunningdale' s minority shareholders can choose in lieu of the S$1.55 cash to be issued with 1,550 shares in Sunrise Technology Investment Holding (Cayman), the holding company of the acquiring vehicle, at an issue price of S$0.001 each.

 

Assuming they have the stomach for such illiquidity, they would effectively be riding along with Mr Koh and Novo Tellus and may find themselves sitting on a decent gain five years down the road.

 

Quarz, however, said in its letter that the notion Sunningdale' s minority investors have an avenue to benefit from enlarged upside by going private with the acquiring consortium is just " a myth" .

 

" We would like to clarify to these shareholders that while Sunningdale' s free float is over 65 per cent of Sunningdale' s total shares, the maximum number of shares in Sunrise allocated to shareholders who elect to join Sunrise is potentially less than 14 per cent of Sunningdale' s total shareholding," Quarz said.

 

Quarz noted that if all minority investors opted for Sunrise shares, only about 20 per cent of their Sunningdale shares would be converted under the pro-rata mechanism. The other 80 per cent of their shares would be exchanged for cash.

 

" Even if only holders of 28 per cent of Sunningdale shares elect to convert their shares, only half of their shares will be converted and they will be forced to sell their remaining 50 per cent shares at S$1.55 per share," Quarz added.

 

Sunrise lifted Sunningdale?

 

Yet, the pull Sunningdale' s minority shareholders will feel to swap their shares for shares in Sunrise is very strong, in my view.

 

Two months ago, when Sunningdale was trading at S$1.51, this column suggested that some investors might be tempted to accumulate the stock with the intention of voting for the offer and electing to receive shares in Sunrise in lieu of cash.

 

Besides getting at least 20 per cent of their Sunningdale shares swapped for Sunrise shares, those investors also stand to make a profit for every Sunningdale share sold to offerors at S$1.55.

 

Since then, Sunningdale' s share price has quietly climbed in a tight trading pattern. Over the last couple of weeks, the stock began nudging the S$1.55 level.

 

Even now, with Sunningdale trading above S$1.55, investors wanting to get into Sunrise might be motivated to keep accumulating Sunningdale in the market.

 

For instance, the purchase of 10,000 Sunningdale shares at, say, S$1.60, would result in a loss of S$400 on the roughly 8,000 shares sold for S$1.55. If, however, the other 2,000 shares swapped for Sunrise shares end up being worth the equivalent of S$3.00 five years later, that would translate to an offsetting gain of S$2,800.

 

Investors who recently accumulated Sunningdale shares with the intention of swapping some of them for Sunrise shares may turn out to be the most determined supporters of the proposed privatisation when it is put to a vote.

 

Better terms the key

 

Judging from the trajectory of Sunningdale' s share price, however, Quarz isn' t wrong about the terms of the Sunningdale privatisation being less than popular.

 

The market was aware that a deal was in the offing at least two months before the precise terms were unveiled.

 

On Sept 9, Sunningdale said that it had been " approached in relation to a possible transaction involving the shares of the company" . During the three trading days that followed, Sunningdale' s share price climbed more than 27 per cent to S$1.59.

 

On Oct 7, the company informed the market that it was " in confidential discussions in relation to the possible transaction" - which pushed its stock price even higher.

 

Just before the deal was announced, the stock closed at an auspicious S$1.68.

 

Then came the disappointment: Mr Koh and Novo Tellus would only pay S$1.55 per Sunningdale share. Within two trading days, Sunningdale' s share price slumped nearly 11 per cent to S$1.50.

 

Quarz is likely to win loud applause if it succeeds in extracting better terms for minority investors in Sunningdale. Voting down the whole deal and leaving Sunningdale adrift is likely to go down less well.