Originally Posted by kovan  An interesting article taken from the Edge:
Quote:
Low Shiong Jin and his associates at Ariel Singapore are trying to transform small, moribund listed companies through RTOs of businesses spanning energy, healthcare and satellite communications. Are they white knights or corporate raiders? And, will investors who jump on the stocks linked to them make money?
Low Shiong Jin didn't display a hint of nervousness or uncertainty as he walked to the podium to address a lively crowd of investors and reporters who had packed a conference room at the Fullerton Hotel two weeks ago to hear about the audacious corporate deal he had organised for Oculus Ltd.
The once dull contact lens maker is going to pay $600 million through the issue of new shares to acquire a much larger, privately held enterprise called Aretae Pte Ltd. Aretae develops environmentally friendly projects that yield carbon credits, which it plans to manage and monetise.
"The new business injection will help create very significant shareholder value and attract more institutional [investor] interest to the company," Low told the room.
Loquacious and immaculately dressed, the 38-year-old Low casts himself as a corporate saviour of sorts. He was appointed to the board of Oculus in June, after a group of investors he represents bought a 29 % interest in it, and has been trying to refashion it into a much more exciting company. He plans to do this through a reverse takeover (RTO) deal - that is, a large acquisition satisfied by the issue of new shares that results in the emergence of a new controlling shareholder.
After a four-year bull market that has the Straits Times Index flirting with the 4,000 mark and investors in the mood to gamble on the fate of corporate shells like Oculus, RTOs have become an increasingly common means for a business to list and raise money from public investors.
"Clearly, there is a segment of the investing public that finds these transactions interesting," says a corporate finance executive. "After all, some of them have performed very well. Wilmar [International] is one such example." Originally known as Ezyhealth Asia Pacific, the dotcom flameout acquired a slew of palm oil plantation, refining and trading assets in a $1.29 billion deal in June last year, sending its shares on a dream run. They touched a fresh peak of $4.34 on Oct 19.
Low hasn't done anything quite as significant yet. Relatively unknown in corporate and financial market circles until recently, his only real achievement so far is resurrecting Ho Wah Genting (now renamed Global Ariel), a bankrupt engineering firm, by orchestrating the $115 million acquisition of a China-based concrete maker. But he might soon have several more completed deals under his belt. Low and his associates, currently hold significant stakes in at least three listed companies, which they plan to use as RTO vehicles. The most closely watched of these at the moment is Oculus. And, the outcome of its proposed acquisition of Aretae could go a long way in shaping Low's reputation in the world of corporate wheeling and dealing.
Getting into carbon credits
Much depends on whether Aretae lives up to the expectations that Low has stoked up in the market. Aretae was set up in 1996 by a bright, young man named David Leong, who initially used it as a vehicle to operate his Internet and wireless communications consulting business. In the course of his career, Leong had worked at SingTel and China Mobile and had been a branding consultant for companies like Ajinomoto, Japan Airlines and Deloitte Consulting. At its peak, Aretae claimed that its consulting business employed more than 200 people and had offices in Hong Kong, Taiwan and Malaysia.
As the Internet mania years passed, however, giving way to the era of global warming and green technology plays, Leong decided that his company should move with the times. Two years ago, Aretae merged with another privately held company called LFGC Corp, which harvests biogases like methane from organic waste dumped in landfills.
And, it took over the assets of Terra Bio Plus Corp, another privately held company that develops composting facilities, which turn waste from plantations into fertiliser and energy. With those moves, the 37-year-oId Leongwho remains the chairman of Aretae, has transformed his company into a developer of projects that help reduce greenhouse gas emissions.
And, he appears to have assembled a team of individuals with the ability and experience to grow its new business. Among Aretae's shareholders and directors now is Stephen Lee, who was a director at LFGC and principal engineer at Terra Bio Plus. Aretae's CEO is 49-year-old Low Chin Nam, who started his career in the Singapore government's elite Administrative Service before moving to the private sector. He worked at Keppel Telecommunications & Transportation from 1990 to 1995, and was C00 of Mobile0ne, the smallest of Singapore's three mobile phone companies, between 1995 and 1998. He later worked at an Australian unit of Digiland International, a small Singapore-listed company that, interestingly, is now considering acquiring new assets in an RTO deal too.
Leong and his associates at Aretae say the company currently has a portfolio of over 30 projects ranging from composting plants to biomass electricity generation facilities scattered across Malaysia, Indonesia, Vietnam, China and Singapore. All in, Aretae expects these environmentally friendly projects to generate an aggregate total of 50 million tonnes of carbon credits.
Under the EU Emission Trading Scheme, spawned by the Kyoto Protocol that seeks to reduce greenhouse gas emissions, companies operating in certain industries in Europe will need to pay a fine or purchase carbon credits generated by environmentally friendly projects like the ones Aretae is developing if their carbon e missions exceed their allowances.The market price for these carbon credits is currently hovering at ?17 or $35 per tonne, and Aretae's backers are hoping that they will scale higher next year once the restrictions on carbon emissions in Europe come into effect.
On the face of it, Aretae's 50 million tonnes of carbon credits would have a potential market value of $1.75 billion. But officials at Aretae warn that it is more complicated than that. For starters, only five of Aretae's more than 30 projects have been fully registered so far. Furthermore, the company has a varied financial involvement in each project, and revenue from the sale of the carbon credits is sometimes shared with its project partners. "We should not just do simple math to place a value," says Tan Teik Chin, a director of Aretae. A more likely value for the carbon credits that Aretae stands to reap from its projects is $800 million to $1 billion, he adds.
RTOs versus IPOs
Oculus plans to acquire Aretae by issuing 1.2 billion new shares priced at 50 cents each to its vendors. Under the terms of the RTO, Leong and the other vendors of Aretae will hold a stake of no less than two-thirds of Oculus' enlarged share capital. They expect Aretae to achieve an earnings before interest, taxes, depreciation and amortisation (Ebitda) of $20 million next year, and $30 million in 2009. And, if the RTO deal goes ahead, they will provide Oculus with a guarantee that its aggregate Ebitda during the two years will be at least $50 million, failing which a proportionate number of their shares in Oculus will be cancelled.
Other key aspects of the RTO are that Oculus will also issue 12 million new shares to a privately held company called BFI Consultancy as payment of an introducer's fee. And, further down the road, Oculus plans to raise $100 million in cash to fund Aretae's expansion.
RTO deals are commonly thought to be a faster, cheaper and easier means of getting listing compared with a straightforward public offering of shares. But corporate finance professionals as well as regulators say this is not entirely true.
According to Lawrence Wong, executive vice-president and head of listings of the Singapore Exchange, there is little difference between the two approaches to getting listed. "There is no [difference] in disclosure between the two. It's exactly the same. It takes about the same time as well - about three to four months. So, not counting the time taken to do your homework on a company for an RTO, or preparing for your IPO, RTOs are not really faster than IPOs."
In fact, officials at Aretae say they had considered a public offering of shares in London, where there is strong investor interest in the kind of business it operates. But they really saw their future in Asia, and wanted their company to be listed close to where it operates its business. "There is potential in listing here, because you have the two biggest carbon generators in the world - China and India - nearby," says Leong. "Being here is an advantage as there are no comparable competitors, and Asia itself will be a big carbon credit generator."
The problem is that investors in Singapore are not familiar with the carbon credits business at the moment, and may be less receptive to a public offering of shares than investors in London. "Frankly, the knowledge of carbon credits in the market here is very low," says Tan. It doesn't help that Aretae's carbon credits business has no earnings track record. According to Leong, the company doesn't expect to make any money until next year, when tighter rules on carbon emissions in Europe kick in. "We are in a land grab situation with our competitors to get as much as we can before g period begins," he adds.
However, for investors in a listed shell like Oculus, the risks associated with Aretae are all relative. Under the RT0 deal, the new shares priced at 50 cents each that Aretae's vendors will receive values their company at $600 million. But the 50 cents per share value also values the shell that investors in Oculus currently own at an impressive $120.7 million. That's a nice incentive for agreeing to participate in the RTO. Indeed, a key advantage of an RTO is that the company seeking a listing obtains an "instant shareholding spread" without having to completely convince the market of the future prospects of its business, says one corporate finance executive.
Shares in Oculus traded at just nine cents before Low and his backers acquired control and began shopping it around as a shell. Following that, the stock was buffeted between 15 and 43 cents as the market waited for an RTO deal of exactly the sort that has been announced. While investors might think twice about forking out cash for an unfamiliar company like Aretae, they are less likely to object to a listed shell they own issuing shares at a stiff premium to acquire it.
White Knight or Corporate Raider?
Low began his carrer as an auditor at a local accounting firm called RSM Chio Lim, before moving to optical disc replication company Datapulse, where he spent eight years as a finance manager. But what he really wanted to do waas to get involved in corporate finance deals like mergers and acquisitions. "I love M&As," Low tells The Edge Singapore. "When I was at university, I did a lot of my research on M&As.
Low got what he wished for through Mike Lee, an old friend of Low's family. Lee had spent most of his life working for SUTL corp, a privately held corporate group in business spanning hotels, property and the distribution of tobacco, fragrances and liquor, which was founded by the late tycoon Tay Choon Hye. Following Tay's death in 2002, Lee went to work for the Global Ariel group, another privately held clutch of companies controlled by Tay's youngest son Andrew, which owns several pieces of the Tay family's corporate empire.
Lee saw opportunity in taking over small, moribund public listed companies and injecting them with more exciting assets, and he figured that Low would be just the man for the job. "Mike is like an uncle to me," Low says. In 2004, Low joined Ariel Singapore, a unit within the Global Ariel group that Low and Lee use to buy controlling interests in their target companies before restructuring them. "Our objective is to act as a white knight for these companies and make them profitable," Low says.
However, Low's deals haven't always gone smoothly, and he sometimes appears to be more a corporate raider than a white knight. In the case of Oculus questions, are already being asked about Aretae's $600 million price tag, after it emerged last week that a key shareholder of Aretae also owns shares in Oculus. According to press reports, Tan owns more than 36% of Aretae, besides being a director of the company. And he also owns shares in Oculus. This crucial detail was not initially disclosed by officials at Oculus in its filing to the SGX. It now has some market watches worried about conflict of interest issues clouding the proposed acqusition of Aretae.
The RTO of Aretae is actually Low's second attempt at restructuring Oculus. In June, Low tried to inject a China-based company called Hunan Zhangjiajie Chalinhe Electric Power Co, which owned hydroelectric power plants and a nine sq km piece of land, into the shell. However, the price tag of $60.5 million was to be paid to the vendors in cash that Oculus would largely have had to raise from bank borrowings. And, a substantial arrangement fee of $40.2 million was to have been paid to a Canadian businessman Cheung Cho Ching through an issue of new shares that would have left him with 29.7 % control of the enlarged company. The deal didn't fly. But Low says he's still in touch with the vendors of the hydropower assets, and is mulling future deals with them.
Low is now also facing a feisty challenge from the board of SNF Corp, his latest target. As of last week, Low and his associates had amassed a more than 18 % stake in the barely profitable electronics company that has been the subject of investigations by the Commercial Affairs Department, and have been pushing for board representation. Things came to a head on Oct 11 when SNF's board of directors received a letter from Ariel Singapore and Low demanding that they resign voluntarily by noon on Oct 15, failing which a shareholders' meeting would be called to remove them. Quoting unnamed sources, the Business Times reported on Oct 12 that the new investors in SNF had lost faith in the board's ability to create shareholder value.
SNF's board of directors struck back immediately. In a blistering response to the Business Times story and the letter from Ariel and Low, they pointed out that the interlopers had managed to build up their sizeable holding in SNF and lose faith in the board's ability to create value within a space of just 21/2 weeks. SNF then announced that it was placing out 31.5 million new shares to 18 private investors at 16 cents each, or a total of $5 million. The new shares represent almost 20% of the company's existing share base. "They are trying to dilute me out," says Low.
Undeterred, Ariel Singapore has filed an injunction to invalidate the share placement. And, Low continues to insists that investors in SNF will be better off if he is allowed to get in the driver's seat. "There are deals that I could have gotten for them, but I was not appointed [to the board]," he says. "I need to be on the inside to see what is going on before I can structure these deals for them. And, I need an executive position for that." Low had initially wanted to inject a gold mine from China into SNF, but now says that he wants to turn the company into a healthcare play.
For its part, SNF has issued a statement expressing its intention to "vigorously" resist Ariel Singapore's injunction against its proposed placement of new shares. The case has been adjourned until November. But Low says that he is pressing for a shareholders' meeting to be called before then to boot the directors out. It is unclear if he will be able to muster the support of SNF's other shareholders for this. But shares in SNF, which soared when Ariel Singapore and Low began buying, have continued creeping higher over the past week. That seems to suggest that the market believes SNF is set to become an RTO vehicle, one way or another. Officials at SNF decline comment for this story.
So, should investors bet on Ariel Singapore and Low? There is little doubt that they are slowly developing a reputation for being able to bring exciting assets and deals to the table. In fact, even as Low works on turning Oculus into a global warming play and SNF into a healthcare stock, he and his associates are already thinking about creating a mobile telecommunications services and satellite technology company out of Enzer Corp.
Ariel Singapore and its associates have accumulated a 24.2% stake in the small electronics company, and Low's mentor Lee was appointed to its board in September. Much like Oculus and SNF, shares in Enzer have soared since Low and his associates arrived on the scene. The counter was hovering at 32 cents last week, a 220% increase from just 10 cents in June.
In the longer term, however, investors face the risk of RTO vehicles not living up to the tremendous hype that is built up initially. Indeed, shares in Global Ariel have gone into a long slide after the injection of the China-based concrete business was completed. Since being relisted in June this year, shares in Global Ariel have tumbled 60% to 16 cents last week. "RTOs do give more visibility, but as a result, investors will expect you to deliver more quickly," says one corporate finance executive.
Back at the Fullerton Hotel, as Low and the officials from Aretae mingled with investors and the press, nobody seemed too concerned about the longer-term risks. Instead, their attention was firmly trained on more immediate matters - specifically, whether the proposed acquisition of Aretae would drive shares in Oculus higher, and the appetising buffet lunch that awaited them.
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