Fair and Reasonable: An Offer, an Unsigned Charter and an Irrevocable
Permai Marine Bhd (PMB) receives a conditional voluntary offer from Straits Offshore Ltd at RM1.35 per share, valuing PMB at about RM810 million. That is a 34% premium to the pre-announcement price of RM1.01, but below the RM1.52 at which PMB traded eight months ago after a contract win. Straits Offshore already holds 29.8%. Its chief executive is the brother of PMB's founder, who holds 18% and has given an irrevocable undertaking to accept. PMB's board appoints your firm as independent adviser. Management's five-year projections, prepared partly for the offeror's diligence, show EBITDA rising 22% a year on the back of a RM1.2 billion charter contract with a national oil company that has not yet been signed. A discounted cash flow at an 11% WACC assuming the contract proceeds gives RM2.05 per share; excluding the contract, RM1.18. No competing bid has emerged, 62% of the free float is held by three institutions, and the stock trades thinly at an average daily value of RM1.1 million.
1. How do you approach the 'fair and reasonable' opinion, and how do you treat the unsigned national oil company contract in the valuation?
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Separate the two words. 'Fair' is about price against value. 'Reasonable' is about everything else a shareholder should weigh. They can point in different directions and the circular must say so rather than blur them into one word.
The unsigned contract is the whole valuation. The spread between RM2.05 and RM1.18 is the value the market is being asked to accept on a promise. Treat it as a probability-weighted scenario, not as a base case: assign an explicit probability range, disclose the sensitivity, and show the value at zero. A contract of this size with a national oil company typically moves through identifiable stages - preferred bidder, conditional award, execution - and where it sits on that path should drive the weighting. Do not adopt management's base case simply because management prepared it.
Test the projections independently. They were prepared partly for the offeror's diligence, which means they have been shaped for a buyer's eyes. Challenge the 22% EBITDA growth against the group's own historical growth, charter rates, vessel utilisation, capex and debt service. Reconcile the DCF to trading multiples of comparable listed offshore operators and to precedent transactions.
Anchor the floor. Net asset value, replacement value of the fleet and the eight-month-high of RM1.52 are all reference points a minority will use. The RM1.52 high is not a valuation, but it is relevant to whether holders will regard RM1.35 as a loss.
Conclusion format. State clearly whether the offer is fair and reasonable, set out the range of values, and say which single assumption would change the answer. A qualified opinion that hides the judgement is worse than a clear one that exposes it.
2. What weight do you give to the absence of a competing offer, the premium and the founder's irrevocable undertaking? What must the circular disclose about the founder, and what do you do if he tells you to call the offer unfair?
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The three factors, weighted honestly.
- Premium. 34% over the undisturbed price is real value for a holder who bought recently, but it is measured against a depressed price. Test the premium against one-month, three-month and twelve-month VWAPs and against the eight-month high - on the latter it is a discount. Say which measures you used.
- No competing offer. Relevant to 'reasonable', not to 'fair'. It means the alternative to accepting may be illiquidity rather than a better bid. With 62% of the float in three institutions and RM1.1 million of daily turnover, the exit problem is genuine, and that supports reasonableness even where fairness is marginal.
- Irrevocable undertaking. 18% is committed, so the practical question for the remaining holders is what happens if the offer succeeds without them - a minority stake in a company with a 47.8%-plus controller. Disclose the undertaking's terms in full: whether it is conditional, whether it survives a higher competing offer, and whether any inducement or side arrangement exists.
The founder and concert-party status. A family relationship with the offeror's chief executive raises a presumption that they are acting in concert. Investigate and, if the presumption cannot be rebutted, the offeror's disclosed holding is effectively 47.8%, which affects the acceptance arithmetic and must be disclosed. Raise it with the SC rather than resolving it yourself.
If he demands a predetermined conclusion. Refuse. An independent adviser gives its own opinion; a shareholder's acceptance decision is his, and he is free to state his own view in a letter to shareholders. If he threatens to withdraw the undertaking, that is a commercial matter for him and the offeror to resolve. If pressure persists, document it and tell the independent directors immediately - the integrity of the opinion is the only thing that makes the role worth having.