May 19, 2010

EONCAP Acquisition : More Sparks

EON Capital (RM6.98; Hold; Price Target: RM7.30)
More sparks 
Following the adjournment of EON Cap’s Board meeting to deliberate on Hong Leong Bank’s RM5.06bn offer, the Board meeting will be reconvened on or before 21 May 10 to consider, among other things, the following: 

(i) the independent financial advisor’s (IFA) opinion; and
(ii) finalization of the terms of the proposed distribution of the proceeds that would be received from Hong Leong Bank Berhad to the shareholders of EONCap pursuant to EONCap’s acceptance of the offer in the event that the offer is approved for acceptance by the shareholders of the EON Cap andapproved by the regulatory authorities.

It was not clearly stated what the content of the IFA report was but it is believed that the full report would be tabled in the upcoming Board meeting. Assuming the IFA report stated that Hong Leong Bank’s valuation of EON Cap is too low, this would put the Board of EON Cap in a difficult position i.e. it appears that the Board is agreeable to the said offer by Hong Leong Bank, yet the IFA report, which offers an independent opinion to the rest of the (minority) shareholders say otherwise. Even then, we believe the Board could still proceed to bring the offer up to the all shareholders at an upcoming EGM, which is supposed to be tabled by end May or early June. 

We can think of the possible scenarios that could be concluded from the upcoming Board meeting: 
(i)  the Board could renegotiate with Hong Leong Bank further on the offer either in terms of pricing or to bring up the matter of including an equity element to the offer,
(ii)  reports have said that Hong Leong Bank believes provisions for certain accounts were insufficient, which means there is a possibility for further adjustments to the offer price
(iii)  call off negotiations talks

We reaffirm our EON Capital’s fair value to the offer price of RM7.30. We think the offer price is fair given EON Capital’s ROE profile of 10-11%. Clearly, as before, should the deal fall through, EON Cap’s share price could correct to its fundamental value of RM6.30 (Gordon Growth Model) in our opinion.

by HWDBS Vickers