A well known local clothes retailer – Crocodile Garments Limited (0122) – has announced that the major shareholder (the Lam family in Lai Sun Group) will buy back all existing shares from independent shareholders at a price of HKD 0.40. Because of this news, Crocodile jumped 87% today to HKD 0.38.
The total amount for the buyback should be around HKD 119 million, and the offeror will finance the cash consideration through bank borrowings.
Personally, I believe the buy back makes sense for the major shareholder as the offered price, although it is already 90% more than the traded price before the announcement, is still 50% below the net asset value per share of Crocodile (even if there is significant writedown of their assets and real estate at the end of this financial year, the offered price should still be below the net asset value per share).
This buyback plan is scheduled to complete by 31 August 2009. What are the risks of this deal not getting completed?
1. Risk of independent shareholders not approving this buyback - I would think the chance of this is slim. (Even the PCCW privatisation got approved in their EGM!)
2. The major shareholders unable to procure enough funding – highly unlikely since the major shareholders are the people behind Lai Sun Group
3. Political risk – personally I believe since this is a relatively small company in terms of capitalization and is less high profile than PCCW, I would believe the chance of it getting criticized in the public is very less.
4. Delay in completing the transaction – To me it seems to be a quite straightforward deal without a lot of counterparties involved. So I believe the risk of this happening is minimal.
Please let me know if I have left out any major risk that needs to be addressed.
I would recommend buying this stock now below or at HKD 0.38. Then by the time this buyout is completed, you will earn a decent 5% return in less than one year.
February 18th, 2009 | Tags: 0122, Crocodile, Crocodile Garments Limited, Lai Sun, privatisation | Category: Companies | Leave a comment
