Tuesday, January 8, 2013

For Adventa two birds in the bush is more than one in the hand

Of course this proverb, "A bird in hand is worth two in the bush" was referring back to medieval times, today it is probably different - as people may think let's go and get the birds in the bushes no matter how hard it can be. The grass is always greener at the other side...Let's recap the story...

Adventa announced the sale of its rubber gloves business to a private firm (Aspion) which is jointly owned by Southern Capital and the family who runs the current Adventa's business. Southern Capital is managed by Tan Teong Hean, the ex-Southern Bank's CEO who at one point of time was sort of forced to sell the bank to CIMB. The total consideration for the gloves business lock, stock and barrel was RM320.85 million hence, valuing the business concern at RM2.10 cash.

If you look at that deal, Southern Capital is run by a very smart ex-banker who probably would not overpay  for the deal especially a business that can be easily valued in the market as it has lots of comparables. To get the owner to continue to be committed, it is a deal which involves the owner himself as he still owns 30% in the private firm.

Now, the reasoning behind this is that the sale is good for all shareholders as glove business is a slow growth business and Adventa will be moving to a more fast pace and stable business i.e. medical-health equipment. All the things that have been done are not wrong as the management decided to distribute RM1.70 out of the RM2.10 in cash to shareholders. That RM1.70 was probably needed for redistribution as who is to pick up the bill for the acquirer company's portion of 30%?

Now, assuming I am allright with all of the above...but how is it that the shareholders can be more bullish of a new business (through some acquisitions) and be thinking that the old business was less than good?

Note: You know what, looking at the share cap and balance sheet, I actually see Adventa doing a private placement or rights issue or warrants within the next 2 years after this cash distribution of RM1.70. Assuming it happens, this means they are asking minorities for money after giving you money. That's fantastic.

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