KINGBOARD COPPER FOIL: Unfair to refer to past trading price

Lotustpsll contributed this article to NextInsight.  He worked 32 years with a global banking group before retiring a few years ago.

One of the common yard-sticks used to appraise the fairness of a buyout price is to examine the offer price against the average share price, say, over a recent 3 or 9 or 12 months.

Let’s consider the buyout offer at 40 cents from the controlling shareholder of Kingboard Copper Foil (KCF).

We can expect Excel First Investments (EFI), the vehicle of the controlling shareholder, to stress this point to show that the offer is generous. But is this really the case? Is it fair to use past share prices as a guide in this case?

Answers for both are an emphatic “NO” and the reasons are as follows. 

The weak share price of KCF in the past was depressed for these reasons:- 

1. Ongoing court case in Bermuda that has dragged on since 2011;

2. KCF has stopped paying dividends since 2011 (but its parent company, Kingboard Laminates, continued to pay dividend);

3. Profitability afffected since 2011;

4. Repeated renewal of the dubious 2-year Harvest contract;

5. Antagonistic conduct of the management (reference – Bermuda Supreme Court judgements and EY’s Report)

By the way, the IPO shares of KCF in 1999 were pegged at 53 cents.

♦ How it started

Kingboard Copper Foil (which produces electrolysed copper foil) entered into a license agreement with Harvest Resource Management after the Petitioner (Annuity & Re Life Ltd) had vetoed the proposed general mandate for interested person transactions at the AGM of the Company on 29 April 2011. The Supreme Court of Bermuda found that, as the majority shareholders failed to promptly initiate negotiations with the minority shareholders with a view to resolving the impasse and take into account the interests of shareholders as a whole following the blocking of the IPT Mandate, the license agreement was a commercially prejudicial means of enabling the Company to circumvent the Petitioner’s legitimate exercise of its right to veto the IPT Mandate.

This is not an ordinary buyout case dictated by market conditions. It is an extraordinary situation driven by a court case.

This case is now subject to Bermuda Court Appeal hearing -- the respondents have lost in the first instance. 

It involves Section 111 of the Bermuda Company Acts (1981) – winding up of the company’s assets. 

Because of the implications of Section 111 and circumstances KCF is in, the appropriate methodology to use to gauge the fairness of a buy-out is to look at Shareholder Equity per share (as a starting point). 

Against shareholder equity per share of 66 cents, the current buyout offer represents a discount of 40%. EFI is getting the other assets of KCF for “free” as its offer is just marginally over the cash balance per share of 39 cents.

Even a layman can understand that this offer does not stack up.

The conduct of that EFI and the management of KCF were clearly encapsulated in the “Findings of the Court” which upheld the grounds of oppressive and unfair conduct as alleged by the Petitioner, thus justifying a winding up on the just and equitable ground (reference – section 170 of Court Judgements). 

Despite the Supreme Court findings, EFI has the guile to make a lowball offer – this is, in my mind, a sheer display of continuing arrogance. They continue to disregard the interests of minority shareholders.

Minority shareholders and fair-minded investors eagerly await the release of the Independent Financial Adviser report and the views and recommendations of the Independent Directors.