The Sunway Group chairman Tan Sri Jeffrey Cheah(left) and Sunway Holdings Bhd managing director Yau Kok Seng (right) at a briefing on Wednesday to announce the merger. Starpic by Chan Tak Kong
Tycoon Tan Sri Jeffrey Cheah, who is behind Newco, also holds 47% and 44% in Sunway and SunCity respectively.
Credit Suisse said investors generally felt the proposed merger was to eliminate inefficiency from duplication of property businesses.
Both companies have their respective property divisions, which means two different property teams running independently, and in some cases, competing against each other for the same property pie, despite having a common shareholder and the same Sunway branding, it said in a report yesterday.
Also, the research house said, the new larger entity would make it more investable.
As two separate entities, the market capitalisation of RM1.4bil for Sunway and RM2.1bil for SunCity made them not so investable and relatively illiquid despite having over 50% free float.
This resulted in both stocks trading at a significant discount to their peers.
We believe this was one of the key drivers for the merger, said Credit Suisse.
The management of the companies was quoted as saying the rationale behind the merger was to have a new entity with a bigger scale and able to extract synergies through economies of scale and integration.
On Wednesday, Sunway and SunCity received a takeover offer from Newco for RM4.5bil in cash-and-share swap.
The exercise entails Newco offering RM2.60 per Sunway share, RM1.50 per Sunway warrant and RM5.10 per SunCity share and RM1.29 per SunCity warrant.
Newco will issue an equivalent value of shares representing 80% of the offer prices and pay cash for the remainder 20%.
The offer would also include Newco issuing new warrants for free to all shareholders of SunCity and Sunway on the basis of one Newco warrant for every five Newco shares.
Based on SunCity and Sunway's last traded prices of RM4.49 and RM2.25 respectively before the announcement, the offer prices represented a premium of 13.6% and 15.5% respectively.
The merged entity could be valued at RM4.5bil, making it the fourth largest property company in Malaysia.
But, Credit Suisse said, at this stage it was not known who would be leading the merged entity and whether key management personnel of the respective divisions would be retained.
At this stage, we are not aware of Government Investment Corp's (GIC) stand on the proposed merger, given that the merger will dilute its current 100% exposure to property to 65% in Newco, it said.
GIC of Singapore holds a 21% stake in SunCity.
We also do not know if Newco will retain its other businesses or dispose of its non-property businesses, like the trading, quarry, construction, and building materials divisions, said the research house.
Meanwhile, Hwang-DBS Vickers Research in a report said the offer price of RM2.60 per share was fair for Sunway.
The offer price is at 4% discount to our sum-of-part derived from target price of RM2.70.
This values Sunway at 13 times of its financial year 2011 earnings per share and 1.6 times book value versus the sector average of 18 times and 1.6 times respectively, it said.
It added that Sunway would be able to leverage on the presence of GIC, SunCity's strategic shareholder and the larger market cap would help build a stronger institutional following.
Cheah is expected to have more than 40% in Newco and GIC 12%.
By The Star
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