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Thursday, December 10, 2015

RSENA: The odds just got better

I will admit it upfront; I do not like SPACs or Special Purpose Acquisition Companies. According to Wikipedia, SPACS are shell or blank-check companies that have no operations but go public with the intention of merging with or acquiring a company with the proceeds of the SPAC's IPO. They reminded me of those insane companies that were listed in England in 1700s or 1800s where their main purpose was to invest in a business that would make a profit (obviously). What business would that be, you asked. They didn't say. And, they all quickly went bust.

SPACs have been around in the US for more than 20 years. As an asset class, its return has been very disappointing. Studies in the US have shown that "SPACs that have succeeded in making acquisitions have severely underperformed the overall market. Out of 162 SPACs that have come public since 2003, 91 (56%) have completed acquisitions and on average they have returned a negative 19.7% per year, compared to a negative 2.7% for the Russell 2000 small-cap index. In contrast, SPACs that are still looking for a combination partner or have announced a proposed acquisition beat the market by significant amounts." (The irony may be lost to some: you succeed by not trying!!!) For more, go here.

If you choose to invest in a SPAC, investorplace recommends the following process for evaluation:

First, who are the people involved in the SPAC? What is their track record? What areas of expertise do they have? Are they planning to purchase something in their wheelhouse of expertise? Have they launched other SPACs and how did those perform?
Most importantly, only select a SPAC that wants an acquisition in an area you understand. It’s no different than buying a stock in a business you understand.
If you feel like management and sector pass muster, then you can buy in.
The next step is to evaluate the potential acquisition once it is announced. While you should read everything the SPAC provides, you should then set it aside and do your own due diligence as if you were buying the company yourself. Remember, once you approve the acquisition, you’re stuck with the company. If it craters, so does your investment. You don’t have to approve the acquisition. You have the option to cash out and get your money back.
One last thing — if a SPAC is headed for an acquisition, then abruptly changes course, get out. It means management didn’t get the deal it wanted, was running out of time to make a deal, and is probably grasping at straws.
Let's comeback to Malaysia. We have seen a spate of SPACs listed in the past 2 years that specialize in the Oil & Gas sector. Fortunately for the management and unfortunately for the shareholders, the O&G sector went South in the past few months. The front runner, Hibiscus had seen its share price dropping to less than RM0.30. This stock was listed in 2012 at an IPO price of RM0.75.


Chart: Hibiscus's monthly chart as at dec 8, 2015 (Source: ShareInvestor.com)

This morning we have the listing of RSENA, a new SPAC that will invest in regional F&B sector. Its sponsors include 2 former senior executives of Fraser & Neave, one of the best managed F&B companies in Malaysia. To me, RSEAN satisfied 2 points - management expertise and sector familiarity - that would put many investors at peace to part with their money.

Mercury Securities valued the stock at RM0.60 based on the assumption of a 20% return over the IPO price. To everyone's surprise (mine included), RSENA opened at RM0.385 while the free warrant opened at RM0.095. This means that an investor who bought 1 RSENA at RM0.50 and received 1 free RSENA-WA would be sitting on a paper loss of 2 sen.

The term of this SPAC requires that 92% of the gross proceed be kept in a Cash Trust Account. Because the management team got their 20%-share at special price of RM0.05 per share, the amount of gross proceed would be about RM410 million (consisting of normal shareholders' contribution of RM400 million & management's contribution of RM10 million). If 92% of this amount is set aside, that means RM377.2 million will be sitting in the Cash Trust Account until a qualifying investment is completed. On paper, each share has a cash backing of at least RM0.38 (rounded up to the nearest sen). 

If you like the F&B sector of a fast growing region & you have faith in the 2 former F&N executives (Joseph Tan & Datuk Tan Ang Meng), this could be a good stock to consider. RSENA is an interesting stock for speculation (for now) as it trades at or below RM0.38.

(Note: Those who bought into Hibiscus at RM0.60 in September 2012, would have made a decent profit if they had taken profit after the announcement of the qualifying investment.)


Diagram: Terms of RSENA (Source: Mercury Securities)

Note:

In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, RSENA, Hibiscus or any other SPACs.

8 comments:

Malaysia Stock Talk said...

"The term of this SPAC requires that 92% of the gross proceed be kept in a Cash Trust Account. Because the management team got their 20%-share at special price of RM0.05 per share, the amount of gross proceed would be about RM410 million (consisting of normal shareholders' contribution of RM400 million & management's contribution of RM10 million). If 92% of this amount is set aside, that means RM377.2 million will be sitting in the Cash Trust Account until a qualifying investment is completed."

The 92% of the gross proceeds to be kept in a cash trust account is excluding the RM10m contribution from the management. So only RM368m would be pplaced in the cash trust account.

Alex Lu said...

Hi Malaysia Stock Talk

Thank you for the correction.

Wang98 said...

Hi Alex

Why does Management say that the SPAC is backed by 46 sen cash ?

Alex Lu said...

Hi Wang88

I wouldn't know. They must give a basis for the statement.

My basis is simple: The public issue is 800 million shares at RM0.50 each, which gives you cash proceed of RM400 million. The management team subscribed for 200 million shares at RM0.05 each, which gives you cash proceed of RM10 million. Collectively, you have 1000 million shares issued and gross cash proceed is RM410 million. There will be charges payable for listing exercise, etc but the terms of the SPAC is that 92% of the gross proceed shall be kept in Cash Trust Account. That worked out to be RM377.2 million (or, 92% of RM410 million). Thus the cash backing per share is RM0.3772 (or RM0.38 after rounding up).

Malaysia Stock Talk said...

Hi Alex and Wang98,

If I may answer the question...

For IPO investors, the IPO price is 50sen. 92% is kept in trust. 50 x 0.92 = 46

As commented above, the IPO issued 800m shares, raising RM400m. 92% of RM368m is kept in trust account.

RM368m / 400m IPo shares = RM0.46

The calculation excludes investment by the management and initial investors

Alex Lu said...

Hi Malaysia Stock Talk and Wang98,

I think MST is right. The 46 sen is 92% of the IPO price. That IPO investment should not be pool together with the management's portion. After all, the management has proposed a qualifying investment and they are unlikely to vote against it. Thus, the public shareholders are entitled to a cash callback of 46 sen per share.

Malaysia Stock Talk said...

If there is no acquisition within 3 years, together with interest, one may get back roughly 49sen to 50sen.

Reach currently offers a "risk-free" yield of 12% per annum

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