What's up with KNM?

The Employees Provident Fund (EPF)’s recent moves to reduce its stake in KNM Group Bhd via disposals on the open market have piqued the market’s interest, especially when an offer for the stock at a higher price is still on the table.

Recent filings with Bursa Malaysia showed that the EPF’s shareholding in KNM has been reduced to 10.38% as at March 30, compared with the 13.01% it owned on Dec 28, 2009.

The EPF sold some 104 million KNM shares in the first quarter, during which time the stock was traded at between a high of 81.5 sen and a low of 71.5 sen.

The stock finished at 73 sen on Friday, two months after major shareholder Lee Swee Eng, along with two private equity funds, made a conditional offer for KNM’s assets that valued the shares at 90 sen apiece.

The offer was announced to Bursa on Feb 4. At the time, the EPF was the second largest shareholder in KNM with a 12.5% stake.

The offer from Lee’s vehicle BlueFire Capital Group Ltd (Bidco) remains on the table as KNM has told the exchange that the parties involved would endeavour to conclude discussions by April 16 after an exclusive period for due diligence expired on March 22.

Speculation is swirling that the buyer may reduce the offer price or withdraw the offer completely.

Some brokers say that a lower offer price would not go down well with the minority shareholders and increases the possibility of the deal being shot down.

KNM slipped into the red in the final three months of its financial year ended Dec 31, 2009 (FY09), which was probably the group’s first quarterly loss since it went public in 2003.

In a statement to Bursa on Feb 25, the company said: “The loss being recognised for this quarter is due to the global economic slowdown, revaluation of properties, provision for foreseeable losses and higher operating costs.’’

It is interesting to note that KNM had decided to book in future losses even as the due diligence by Bidco was being conducted.

The takeover is seen to be “friendly”, as it is being initiated by KNM’s major shareholder. Lee, who is also the company’s managing director, would have good knowledge of KNM’s books.

With the Securities Commission and Bursa looking to tighten rules on privatisation, this could be Lee’s last opportunity to buy over the company he had founded.

Lee first expressed his intention for a management buyout in March last year.

A check on Bloomberg revealed that most analysts who covered the stock have a target price of 90 sen, perhaps an indication that the majority expect the deal to go through.

So it is quite perplexing that the EPF is aggressively trimming its holding at current price levels.

It is reported that there could be an offer for EPF to roll over its shares in KNM into a new company that will own KNM’s assets.

EPF declined to comment for this article.

The pension fund had over the past two years increased substantially its shares in KNM and, at the peak, had owned as much as 513.6 million shares in the oil and gas fabricator.

Latest filings with Bursa, however, showed that it has reduced its shareholding over the past three months to 409.6 million as at March 30.

Based on information posted on Bursa’s website, the EPF’s stake in KNM stood at 325 million at the end of 2008.

That year saw KNM complete a one-for-four rights issue followed by a two-for-one bonus issue.

source: TheStar