Sep 07, 2016 10:38:31

Indofood Sukses Makmur: New structure in the China Minzhong divestment (INDF; Rp8,375; Under Review)

- Yesterday, Indofood Sukes Makmur ($INDF) signed an Implementation Agreement with China Minzhong Holdings (CMZ BVI) and Marvellous Glory Holdings (Marvellous BVI) related to the changes and the implementation of the planned shares buyback of China Minzhong Food Corporation (CMZ) shares from INDF. About 92.99% stakes of Marvellous BVI is indirectly owned by Anthoni Salim, the CEO of INDF.

- New agreement. INDF, CMZ BVI and Marvellous BVI agreed to change the structure from planned acquisition into voluntary conditional offer, where Marvellous BVI intends to make a voluntary conditional offer to acquire all the issued and paid-up ordinary shares of CMZ, which includes INDF’s entire 543m shares ownership, at a price of SGD1.20/share (similar offer price as stipulated on the previous MoU). That said, Marvellous BVI intends to privatize and de-list CMZ.

- New transaction structures and terms. Several terms were disclosed, but we will discuss the relevant ones here. First, Marvellous BVI requires that it owns more than 50% stakes in CMZ at the closing of the offer (31 December 2016 is the deadline). We think this should be met as INDF itself owns 82.88% stakes. Second, the offer can only be accepted in either of these two options: a) full-cash settlement for SGD1.20 per share; or b) combined 64% in cash and 36% in Exchangeable Bond that can be exchangeable into CMZ shares at a price of SGD1.20/share.

- What will INDF do? INDF chose the second settlement option, where it will receive SGD416m cash and Exchangeable Bonds worth SGD235m, which will be converted into 29.94% stakes in CMZ shares. The first SGD40m payment made by CMZ BVI previously on 30 December 2015 would be treated as part of the cash settlement. INDF decided to take the second option as the management still believes in the mid-to-long-term outlook of CMZ and the potential synergy with INDF; that said it prefers to retain 29.94% stakes in CMZ.

- What do we think? The partial divestment could still reduce investors’ uncertainties and improve INDF’s risk profile, which should reduce INDF’s valuation discount to its listed subsidiaries. The SGD416m cash proceeds from the divestment could also be used to repay the approximately SGD400m debt that INDF took to acquire China Minzhong back in 2013. Full-repayment could reduce net gearing from 61% (using June 2016 position) to 47%. Despite the change in the divestment terms, both will still lead to the same outcome where INDF would retain 29.94% stakes in CMZ. In the longer-term, however, there could still be risks if INDF decided to increase its stakes in CMZ, which has a more volatile earnings and lower ROIC relative to INDF