CK Group

CK Group Plc (CK) 

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Last night, CK, BECL, BMCL and CKP announced a corporate restructuring plan. BECL and BMCL will merge, while CK will support the merger by buying BMCL from BECL and purchasing BMCL stock and/or BECL stock from shareholders that oppose the amalgamation. CK will finance part of the cost by selling its entire stake in Xayaburi to CKP. The details are as follow:

BECL and BMCL will swap shares at a ratio of 1 BECL share-to-8.65537841 MergedCo shares and 1 BMCL share-to-0.42050530 MergedCo shares, implying 20.58 BMCL shares-to-1 BECL share.

CK will sell its entire stake (805m shares) in Xayaburi Power to CKP for Bt4,344m and will support the merger by: 1) buying 2,050m shares in BMCL from BECL at a price of Bt1.79 apiece, totaling Bt3,670m, and 2) buying BMCL shares and/or BECL shares from dissenting shareholders. However, CK will purchase no more than 8% of the total BMCL shares and no more than 10% of the total BECL shares from dissenting shareholders. The total value of the transaction must not exceed Bt10bn.

CKP will increase its capital via a Rights Offering of 2.94 existing shares to one new share at a price of Bt3 (after a par split from Bt5 to Bt1). Also, warrants will be issued at a ratio of 1:1 with an exercise price of Bt6.

Our thoughts

CK looks set to benefit the most from these transactions, as it will divest Xayaburi (which will post losses until 2019) at a good price, while cash from the divestment will be used to buy BECL (profitable and cash-rich) and BMCL (high growth potential and turnaround story). The net after-tax gain from the Xayaburi divestment will be about Bt1.6bn, or Bt0.95/share. We have raised our target price to Bt32.75 and upgraded our call to BUY!

With regard to BECL and BMCL, the amalgamation should be mutually beneficial for the two firms—BECL has a strong balance sheet but only limited investment opportunities, while BMCL needs to expand its financial capacity to fund its future investment plans. Moreover, the merger should strengthen MergedCo’s capability to achieve growth over the long-term. The swap ratio and yesterday’s closing prices implied BECL’s share price at Bt49 and BMCL’s share price at Bt2.06. We also preliminarily estimate that BECL will post an extra gain of about Bt1.2bn from the sales of BMCL shares. BUY BECL!

The acquisition of Xayaburi from CK was expected eventually, but the timing surprised us, as the project isn’t slated for COD till 2019. The RO will raise Bt5,610m, which will be sufficient for the acquisition price of Bt4,344m—CKP also has Bt1,800m of cash on-hand and its D/E ratio is 1.95x, which provides additional assurance. The new implied par split is Bt3.90, making the Bt3.00 RO possible, though the dilution effect will be 30%. We have downgraded our rating to HOLD. We believe that all of CK Power's existing projects are priced into its current share value and the income contribution from Xayaburi is too far into the future to be factored into our model.