On 10 October 2024, Public Bank Bhd announced its acquisition of 175.9 million shares (44.2%) of LPI Capital Bhd for RM 1.72 billion or RM 9.80 for each share.
Source: The Proposal
How is this transaction fare to both shareholders of Public Bank Bhd and LPI Capital Bhd? For a start, I like to disclose that I now own a small position in Public Bank Bhd and was a shareholder of LPI Capital Bhd (I sold it off last year to buy a second-hand car). Here, you may belong to any one of the following groups:
In this write-up, I’ll explain the method to evaluate the Proposal and weigh in implications to their shareholders. This allows us to make informed decisions as investors. I’ll start by offering a brief background of both Public Bank Bhd and LPI Capital Bhd, move onto evaluating the transaction, and would end the write-up with a discussion on the Restricted Offer For Sale (ROFS) of shares of Public Bank Bhd by the Teh Family.
Public Bank Bhd
Public Bank Bhd is a public listed bank, which has RM 525.6 billion in total assets in 1H 2024. In the past 12 months, Public Bank Bhd had delivered RM 6.75 billion in earnings, which translates to 34.78 sen in earnings per share (EPS). Before its announcement, its stock price on 8 October 2024 was RM 4.57 a share, translating to its market capitalisation of RM 88.7 billion.
LPI Capital Bhd
LPI Capital Bhd is a public listed general insurer which possesses RM 4.68 billion in total assets in 1H 2024. In the last 12 months, LPI Capital Bhd had delivered RM 355.2 million in earnings or 89.18 sen in EPS. Before its announcement (8 October 2024), its stock price was RM 13.00 and thus, translating to its market capitalisation of RM 5.2 billion.
Consolidated Teh Holdings Sdn Berhad
Tan Sri Dato’ Sri Dr. Teh Hong Piow (THP) founded both Public Bank Bhd and LPI Capital Bhd.
THP owned 0.64% direct and 22.77% indirect shareholdings of Public Bank Bhd. Also, THP had owned 1.41% direct and 42.74% indirect shareholdings of LPI Capital Bhd. So, in total, THP had owned 23.41% and 44.15% shareholdings in Public Bank Bhd and LPI Capital Bhd.
THP’s indirect shareholdings in both Public Bank Bhd and LPI Capital Bhd are now held with his holding company, Consolidated Teh Holdings Sdn Berhad.
The Transaction
Public Bank Bhd is acquiring 44.15% equity interests in LPI Capital Bhd from THP and also from Consolidated Teh Holdings Sdn Berhad for RM 1.72 billion or RM 9.80 a share.
Based on LPI Capital Bhd’s latest 12 months EPS of 89.18 sen, the acquisition price of RM 9.80 is valued at P/E Ratio of 10.99. It is lower than LPI Capital Bhd’s historical P/E Ratio that ranges between 12.4 – 21.1 (2014-2023).
Source: LPI Capital Bhd’s Annual Report 2023
Impact to Public Bank Bhd
Upon this acquisition, Public Bank Bhd shall own 44.15% shareholdings of LPI Capital Bhd. This adds RM 2.07 billion in total assets and RM 156.9 million in earnings to Public Bank Bhd. Based on 19.41 billion shares, that works out to be an additional 0.8 sen to Public Bank Bhd’s EPS if its acquisition was completed 12 months ago.
Proposed MGO
According to the Capital Market Services Act (CMSA), Public Bank Bhd is obligated under the MGO to buy all remaining shares of LPI Capital Bhd at RM 9.80 each from other shareholders.
From the Proposal, it stated that Public Bank Bhd does not intend to invoke the provisions under Section 222(1) of the CMSA to compulsory acquire all remaining shares of LPI Capital Bhd from other shareholders of LPI Capital Bhd who have not accepted, refused or rejected the Proposed MGO. Public Bank Bhd intends to maintain the listing status of LPI Capital Bhd.
In other words, if a shareholder views LPI Capital Bhd’s shares to be valued more than RM 9.80 a share, he can choose to reject the offer from Public Bank Bhd when it comes.
Restricted Offer for Sale (ROFS)
In conjunction to announcing the Proposal, Diona Teh, the youngest daughter of THP, had made an announcement to reduce the Teh family’s interest in Public Bank Bhd from 23.4% to 10.0% in the next 5 years via ROFS as approved by Bank Negara Malaysia (BNM). This includes offering a portion of shares of Public Bank Bhd to its eligible employees, directors, and shareholders at a discount. The details of ROFS is to be announced in the future.
Conclusion:
From this transaction, Public Bank Bhd would welcome LPI Capital Bhd and they would create a much better cross-selling synergy between each others’ products to each other’s clients. It could bring in higher fee income and reduce marginally the reliance of net interest income for the bank in the immediate future. Meanwhile, LPI Capital Bhd could benefit from leveraging Public Bank’s extensive branch network to distribute and sell its insurance products.
Bonus Section: If You Think … Then You Would …
So once again, back to Group 1-4.
Here, I’ll put myself into the shoes of all 4 groups and list down possible actions where each can take to make the best situation out of this transaction.
If You Think The Offer Price of RM 9.80 is Too Low:
As Public Bank Bhd’s shareholders, I suppose you would be smiling. But, if you own LPI Capital Bhd as a shareholder, you can choose to reject the Proposed MGO. Here, it’s useful to focus on LPI Capital Bhd’s business fundamentals and possible synergies which can be created from this transaction. There is no need to be “anchored” on the offer price.
If You Think Public Bank Bhd Will Privatise LPI Capital Bhd:
You are speculating. The Proposal clearly stated that Public Bank Bhd does not intend to invoke the provisions under Section 222(1) of the CMSA to compulsory acquire all remaining shares of LPI Capital Bhd. It also intends to keep LPI Capital Bhd listed on Bursa Malaysia. Thus, it would be better to make decisions based on facts and not “speculate” on anything beyond.
If You Think of Buying / Selling Them as their prices fell after the announcement:
If the primary reason to buy or sell shares of Public Bank Bhd and LPI Capital Bhd is on this one short-term event and nothing else, you are speculating on this short-term event. However, if you are an investor who is already interested in accumulating these stocks, it is practical to calculate their valuations first (like P/E Ratio) before making your investment decisions.
If You Think The Market Sees This Negatively
Why bother about the market? The market could be irrational as humans are mostly irrational. In the market, there will always be people “reacting” to short-term or one-off events. Such causes a volatile market in the short-term. Such is bad for speculators and useful for investors, who would want to accumulate good businesses for their earnings growth in the long-term. When dealing in short-term or one-off events and announcements, investors would ask:
- Is this announcement material in relation to the size of the company?
- How will this announcement affect the stock’s business fundamentals in the long run?
- Am I interested in accumulating these stocks for the long run?
- What are the current valuation ratios of these stocks? Are they attractively valued?
- Do Public Bank and LPI constitute a big percentage in my portfolio?
- Am I interested in averaging up or averaging down these stocks currently?
I believe the above questions are more practical than just merely speculating prices. Remember this: People who focus on the markets are speculators. People who focus on businesses are the real and genuine investors. If you are a speculator, all the above writings would be useless. But, if you are an investor (at core), you can make your own conclusion to the above writings.
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