Accept Nam Tai's offer for NTEEP
24 February 2009
Nam Tai Electronics, Inc. (NTE, NYSE:NTE) has launched a new privatisation offer for Nam Tai Electronic & Electrical Products Ltd (NTEEP, 2633.HK), at $1.50 per share. The offer comes just over 3 years after a failed offer at $1.80 per share, which received only 69.81% acceptances, less than the 90% acceptance condition, which was not waived. Webb-site.com opposed that offer. Since that time, NTEEP has paid dividends of $0.435 per share.
NTE needs 90% acceptances of the offer in order to compulsorily acquire the remaining 10% of the public float and delist NTEEP. The offer is final and will not be increased. If the offer fails, then under the Takeover Code, NTE cannot normally come back with a new offer for 12 months.
Webb-site.com editor David Webb now holds over 10% of the free-float of NTEEP (but less than the 5% disclosure threshold) and intends to accept the new offer, for reasons explained below.
When the previous offer closed on 5-Dec-05, the Hang Seng Index closed at 15,159. It closed last night (23-Feb-09) at 13,175. Including dividends, it has a total return of -4.0%. NTEEP's new offer of $1.50, together with dividends received of $0.435, makes a total of $1.935 (ignoring dividend reinvestment opportunities), which is a positive return of 7.5% compared with the previous offer of $1.80. This in itself is not a good reason to accept the offer, but it does provide a reference point.
In late 2007, NTE and NTEEP announced a complicated reorganisation in which two businesses were to be injected by NTE into NTEEP in a connected transaction involving a heavily dilutive convertible bond. After lobbying by Webb-site.com, the plans were revised, but not to our satisfaction. We opposed NTEEP's purchase of the Zastron and Jetup businesses, pointing out that the quarterly figures showed that Zastron's sales and profits were in decline while NTEEP's were growing, and the Zastron acquisition was heavily overpriced at 15.7x trailing earnings, far higher than NTEEP's own P/E at the time. In a narrow vote on 5-Dec-07, minority shareholders approved the deal by 57.4% in favour to 42.6% against, with voter turnout of 58.4% of eligible shares.
We have since been proven right - in the year to 31-Dec-08, sales of the Zastron "Telecommunication Component Assembly" business dropped 33.5% and Zastron contributed just US$3.585m of net profit, while the Jetup LCD business lost $3.365m. Meanwhile, NTEEP's original business contributed $32.811m of net profit on sales which fell only 4.4%. NTEEP would have been far better off without these acquisitions. Not to put too fine a point on it, NTEEP's minority shareholders were screwed.
At 30-Sep-07, just before the reorganisation, NTEEP had $1.06 per share of net cash, but the acquisitions for US$353.1m ruined that, saddling NTEEP with US$311m of debt to its parent. At 31-Dec-08 NTEEP had net debt of US$182m, or about HK$1.61 per share. The results announcement showed a net loss of US$121.93m, but that is after writing off $144.55m on goodwill and intangible assets from the acquisitions, so core earnings for 2008 were actually about US$22.62m, or about HK$0.200 per share.
While it is clear to us that the connected acquisitions destroyed shareholder value in spades, that is history now. The offer represents an exit P/E of 7.5x trailing earnings. Given the weak balance sheet situation, we regard today's privatisation offer as fair and reasonable.
As a footnote, on 11-Jun-08 NTE disclosed its interest at 74.02% of NTEEP. In today's announcement, it shows an increase of 7,624,000 shares to 74.88%. According to the Webb-site.com CCASS Analysis service, the CCASS holding of BNP Paribas Securities (Asia) Ltd increased by exactly that amount between 13-Jun-08 (the settlement date for purchases on 11-Jun-08) and 29-Jul-08 with no disposals, and has been unchanged since then. So NTE almost certainly holds part of its interest via this broker.
© Webb-site.com, 2009
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