On 25 February 2020, BreadTalk Group’s founder George Quek led a consortium to launch a privatisation offer for his company at S$0.77 per share.
BreadTalk’s shares have been halted since Friday and the offer marks a premium of 19.4% over its last traded price of 64.5 cents earlier on Feb 24.
Once hailed as a successful home-grown company to expand beyond the shores of Singapore, BreadTalk’s proposed delisting will no doubt be ‘stunning’ to many investors. If the privatization goes through, BreadTalk will join other few well-known Singapore companies who chose to delist in SGX such as Eu Yan Sang, Osim and Cityneon.
That aside, I want to present my point of view about this delisting offer.
Background
The Company, its subsidiaries and associated companies (collectively, the “Group”) are a global food and beverage (“F&B”) lifestyle group, managing 13 different F&B brands, with close to 1,000 outlets spanning 16 countries, supported by a global staff strength of 7,000.
Their iconic brands are categorized under 4 main divisions as shown below:
Offer Details
The offer is made through a special purpose vehicle called BTG Holding and it has offered to pay S$0.77 for each share of BreadTalk that they don’t already own.
The consortium partners currently own 70.53% stake in the food and beverage company through the following members:
(i) Dr George Quek Meng Tong (“GQ”), Ms Katherine Lee Lih Leng (“KL”), Square Investment Pte. Ltd. (“Square” and, together with GQ and KL, the “Co-Founders”) and Piece Investment Pte. Ltd. (“Piece”), which is a special purpose vehicle established by GQ and KL; an
(ii) Primacy Investment Limited (“Primacy”) and a directly wholly owned subsidiary of Primacy, Minor BT Holding (Singapore) Pte. Ltd. (“Minor BT”).
Why does George Quek want to delist BreadTalk
The Offer announcement stated 4 reasons for the rationale behind BreadTalk’s delisting offer (simplified in my own words):
1) Compelling Premium. The offer price provides a 19.4 per cent upside over the closing price per share of S$0.645 before the announcement was released. It also represents a premium of approximately 25.0 per cent over the volume weighted average price (“VWAP”) per Share for the 6-month period up to and including 21 February 2020.
2) Greater Management Flexibility. The consortium believes that privatising the Company will provide them more flexibility to
- Address the challenges facing the Group
- Manage the business of the Company and
- Optimise the use of the Company’s management and resources.
3) Save Maintenance Costs of Listed Status. In the event that the Company is delisted, it can save on related compliance and associated expenses to maintain a listed status. The savings can then be properly channelled to reinforcing its business operations.
4)No Necessity for Access to Equity Capital Markets. BreadTalk has not tapped the equity markets (think rights issues) to raise capital for the past 10 years and unlikely to do so in the foreseeable future. Hence, the company feels that there is no necessity to maintain a public listing.
But these are very templated reasons for delisting. Most companies use close variants of these so not that helpful.
1) BreadTalk performance has deteriorated
I don’t know the actual reason but I speculate that the business has not done as well as he wanted.
It might be coincidental but the CEO, CFO and CIO have all been changed since Aug 2019.
Although the CEO resigned citing health and personal reasons, we will never know whether that’s the real cause as an outsider.
My sixth sense tells me that it has got to be something to do with the performance which has been deteriorating.
In its recent FY2019 result announcement, BreadTalk made a net loss of S$5.24 million for the year ended Dec 31, 2019 versus a profit attributable to shareholders of S$15.19 million a year ago.
| Figures in ‘000 | FY2015 | FY2016 | FY2017 | FY2018 | FY2019 |
| Revenue | 624,149 | 614,995 | 599,747 | 609,796 | 664,930 |
| Gross Profits | 328,813 | 337,487 | 333,282 | 343,146 | 369,503 |
| Interest Costs | (5,322) | (5,931) | (5,420) | (9,206) | (22,070) |
| Profit Attributable To Shareholders | 7,602 | 11,436 | 21,848 | 15,191 | (5,245) |
Referring to the table above, we can see that the total revenue and gross profits has somewhat gone downhill since 2017 which the ex-CEO was in charge.
Upon deeper digging, BreadTalk’s lower profits can be attributed to 2 main reasons:
- Escalating interest costs which jumped from S$5.3 million in FY2015 to S$22.07 million in FY2019.
- Higher distribution, selling and administrative expenses.
Which brings us to BreadTalk’s financial position:
Looking at the above chart, the firm’s financial position (black line marking the net debt) has been deteriorating at an alarming rate. Its net debt surged more than 300% from S$61 million in FY2016 to S$189 million in FY2019.
Given how long the revenue and profits have remained gone downhill, as a major shareholder and founder of BreadTalk, George Quek has to do something!
2. BreadTalk is at a low price for privatisation
Buy low and sell high. Insiders will always prefer to IPO during a bull run and delist during bad times.
BreadTalk share price has ranged between S$0.50 to as high as S$1.25.
An offer of S$0.77 is a decent price to buy the entire company back from other shareholders.
It is a price that I believe can pull through as investors who bought BreadTalk’s shares before Aug 2019 would have made profits. Only shareholders who bought between May 2017 to June 2019 would be sitting on some losses if the offer goes through at S$0.77.
With 70.53% ownership, the Offeror should be able to get enough acceptances to cross the 90% mark.
The best time to buy back a company is when the results are not good, share prices are low and outlook is bad. BreadTalk happens to be in this sweet spot.
The outlook is bad because of the Covid-19 impact as well as the slow down in China.
George Quek must be confident to nurse BreadTalk back to health and hence this Offer. But it will probably take some time to close down underperforming branches to push up profits and pare down its debt accordingly.
What should investors do?
I believe the Offer has a high chance of going through because of the high ownership level and it is a decent price offered during a period of poor market conditions and a sea of bad news.
One way to comfort yourself is that this offer price is a cash exit opportunity for you to realise your entire investment at a premium to the prevailing market prices. With many other stocks dropping like grapes, you may feel better to rotate to other stocks with better fundamentals than hold onto BreadTalk who is still trying to find its way out of its rut.
That said, in any delisting offer, shareholders can afford to be patient and monitor the rate that the shares have been collected by the offeror. Shareholders can decide to sell the shares as the offeror is closer to the 90 percent mark.
And many shareholders are lamenting whether they should buy it now at the last closing price of S$0.76. I personally think it is too late to join the party now since there’s only a measly 1.3% gain from the offer price and you still need to wait for a few months before the offer is paid out in cash too.
All in all, I hope the article will help you in understanding the BreadTalk S$0.77 offer better.
P.S. I am stating my opinion and not recommending any course of action. I have no shares in BreadTalk.
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What about price/book ratio? What is Breadtalk’s book value? Isn’t that is the way to go? Why is it that companies after listing with padded pockets from public funds during IPO, delist on poor market sentiment and further insult us with ridiculous offer (coat it with premium!). In poor market sentiment, the price of the entire company capitalisation can be based on perhaps as little as 1000shares and on only chosen day(s)?
You know ‘market price’ of the day can also be rigged esp those counters with low trading volume. The buyout is easily capitalised with fat funds from IPO. Historically few companies have listed, delist and list again, in Spore or some overseas exchanges! Is this a modern day legal scam to rip the ignorant public?
They are businessmen 🙂 They are the price setters. Investors are price takers. That’s why I believe in financial literacy and wise ourselves up. We can choose not to buy an overpriced IPO for e.g.
I agree with Fred.
I think MInor Int’l is getting b.t. for a “song and a dance”.
Minor’s stock is no bargain….or is it?
THank you Mr. Chow for printing my reply.
In less than 5 years, b.t. will be here in the U.S. and doing fine.
I think b.t. is reporting loss and hiding the profit.
I’ve been to b.t. in Spore and Bangkok and there are people happily buying their products. Who’s foolin’ whom.
b.t. could’ve at least declared a dividend.
What is Quek doing investing in a department store in Taiwan?
Shouldn’t he be concentrating on his core business?