Name: TRIplc Berhad
Price (MYR): 2.39
Market cap (MYR): 165m
Market cap (USD): 42m
On the 15th of February, 2018 TRIplc Bhd shareholders voted in favour of a restructuring plan that will see the company sold to Puncak Niaga Holdings Bhd (KLSE:PUNCAK) and Pimpinan Ehsan Bhd (a shell company with no operations) assuming the listing status on the Bursa Malaysia.
Here’s where it gets interesting. The acquisition price equates to a little over MYR 3.00 per share, versus a last traded price of only MYR 2.39…
But wait, there’s more. Post the acquisition, around MYR 1.95 per share will be distributed via a special dividend – returning ~82% of the initial invested capital. Of the remaining cash, MYR 0.10 has been earmarked for 12 months working capital, and the remaining MYR 0.95 will be locked in a trust that can only be used for an acquisition approved by shareholders – reducing the risk of it being swindled away through unscrupulous management.
If no acquisition is made within 12 months, the company will be wound up and the remaining cash distributed to shareholders.
|Remaining capital at risk:||0.44|
|Distributable cash:||= 3.00 – 1.95 – 0.10|
|Return on invested capital:||= 0.95 / 0.44|
|Return on initial capital:||= (3.00 – 0.10) / 2.39|
What I like
Through the special dividend, around 80% of the initial capital will be returned, dramatically reducing the risk, while also increasing the potential return on the capital that remains invested.
While typical risk arbitrage is contingent on a merger being approved by shareholders and the relevant authorities, that is not the case here – everything has been given the “go ahead.”
Successful Malaysia businessman Tan Sri Rozali Ismail (26% shareholder in TRIplc and an estimated net worth in excess of US$150m) will join the shell company as Executive Chairman and search for a suitable acquisition candidate.
The hard catalyst of the cash being returned if an acquisition isn’t made within 12 months reduces the risk of the stock trading at an ongoing discount to its net cash value.
What I don’t like
As of the last report I can find, TRIplc had around MYR 264m in net debt and given the complex nature of the share transfer before acquisition, I’m unsure who will assume responsibility for it – i.e. does it go with TRIplc in the acquisition or remain as part of the holding company? I assume the former, however, I do not know for certain.
Also, if the company does find a company to acquire with the remaining funds, there is a risk that it turns out to be a poor use of capital. I have no insight into the M&A skill of those who will be responsible for the allocation of capital, however, the Executive Chairman has amassed a substantial net worth. The other side of the coin however, is that they could make a terrific acquisition and cash flows are valued much higher than cash, leading to a greater profit than possible from the simple return of cash.
So it’s not without risks, however, you are compensated through optionality to the upside too.
The key attraction for me is the quick return of ~80% of the initial capital. This reduces risk and increases the potential return on committed capital dramatically. I believe TRIplc offers a low risk 20% return on total invested capital over the next 12 months if a deal is not found and the cash is returned. However, if an acquisition is made, the return profile changes and is impossible to be calculated before the fact – this provides the potential for increased gains as well as potential losses.