Innopac Holdings Ltd - Why not waive two conditions to see Merlin Diamond takeover through?

18/7/2013 – Innopac Holdings Ltd's takeover of ASX-listed Merlin Diamonds Ltd has failed.

Investor Central raised questions on the takeover offer in our earlier report on June 28.

In its takeover offer – which closed at 7pm Melbourne time last Friday – Innopac said two conditions were not met.

First, it couldn't get acceptances of at least 90% of the shareholders of Merlin Diamonds Ltd.

Only 72.73% shareholders of Merlin Diamonds accepted the offer.

And second, the convertible notes issued by Merlin Diamonds to ISR Investments Ltd had to be converted into Merlin shares before the takeover offer ended.

But ISR Investments Ltd did not convert the notes into Merlin Diamonds' shares.

Innopac could have waived both conditions, but didn't.

Therefore, those Merlin shareholders who accepted Innopac's offer will retain their Merlin shares and will not be issued any shares in Innopac.

On SGX, Innopac said it no longer had any interest in the shares of ASX-listed Merlin Diamonds Ltd.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Why did it not waive the two takeover conditions in order to see the deal through?

Last week, on July 11, The Australian newspaper ran with Investor Central's story on Innopac.

The next morning, The Australianreported that the Australian Securities & Investments Commission (ASIC) was monitoring the mysterious takeover bid for Merlin Diamonds.

Innopac's offer for Merlin Diamonds Ltd was scheduled to close later that day.

And now, Innopac has terminated the takeover offer on the grounds some conditions were not met, even though it could have waived them.

Question

2. What is Joseph Gutnick thinking now?

Though the takeover offer has failed, Joseph Gutnick - the Chairman and CEO of Merlin Diamonds - has nothing to worry about.

Mr Gutnick's Legend International sold a 37% stake in Merlin Diamonds for A$12.5 mln in cash during the offer period, and now holds a negligible stake.

Question

3. What now for Merlin's minority shareholders?

Merlin Diamonds' minority shareholders got neither cash nor shares in Innopac.

Their company is now substantially controlled by six shareholders who are linked to Innopac.

What are their plans for the company?

Question

4. Did new Merlin Diamonds shareholders violate the takeover code in Australia?

According to the takeover provisions in Australia, Section 606 of the Corporations Act 2001 prohibits acquisition of over 20% shares in a listed company by an individual or individuals acting in concert.

In the case of Merlin Diamonds, six Singaporean businessmen bought 98.6 mln shares or about a 63% stake in Merlin Diamonds from December 31, 2012 to March 21, 2013 for A$0.20-A$0.22 per share, totalling A$20.7 mln in cash.

All six businessmen – Edwin Sugiarto, Vernon Khoo Tiam Hock, Goh Hin Calm, Gary Tan Boon Kiat, Lim Kuan Yew and Lee Chai Huat – are closely related to Innopac, either through cross shareholdings or as office bearers of Innopac shareholders.

The reasonable mind would wonder if they were acting in concert while buying a majority stake in Merlin Diamonds.

If yes, does this constitute a violation of the takeover provisions of the Corporations Act 2001?

ASIC would know better than us.

Question

5. Did Merlin Diamonds' Secretary Peter Lee know ISR Investments Ltd?

In December last year, Merlin Diamonds announced it was issuing convertible notes to ISR Investments Ltd, a British Virgin Islands company, for A$8 mln.

These notes are convertible into Merlin shares anytime within a year.

After approval from its shareholders in a general meeting in May, Merlin Diamonds issued the convertible notes to ISR Investments Ltd on June 7.

Just two weeks later, on June 20, Innopac extended the offer to July 12.

Originally, Innopac's offer for Merlin Diamonds' shares was to expire on June 28.

ASIC allowed it to extend the takeover offer so that the notes issued to ISR Investments Ltd could be converted and the new offer accepted.

In the meantime, an interview appeared in the Sydney Morning Herald in April.

In that interview, Peter Lee - the CFO of Merlin Diamonds and company secretary of Legend International and other companies of Mr Gutnick - said he didn't know who was really behind ISR Investments Ltd.

The newspaper's "CBD"-column reported:

"CBD" asked if Lee could say who was behind the BVI company, ISR Investments. 'No, because I don't know them, ' he said.

However, Investor Central can reveal that the director of ISR Investments Ltd is Neo Kim Hock, the executive chairman and single-largest shareholder of Blumont Group Ltd, which itself is the third largest shareholder of Innopac with an 8.66% stake on April 1, 2013 (Source: Innopac's 2012 Annual Report).

Neo Kim Hock's directorship of ISR Investments Ltd was revealed in the announcement of Merlin Diamonds on December 20, 2012, and again in the announcement on April 22, 2013.

The counter signatory on page 29 of these documents was: Peter Lee.

Question

6. Is ISR Investments Ltd related to Innopac?

Unless there are two Neo Kim Hocks, Merlin Diamonds Ltd issued convertible notes to the controlling shareholders/insiders of Innopac.

And, Innopac's insiders can convert convertible notes into 8 mln Merlin shares – or about 4% of Merlin's share capital - at 22 Australian cents per share.

Question

7. Why didn't ISR Investments convert the notes into Merlin shares before Innopac's offer lapsed?

Surprisingly, ISR Investments Ltd didn't convert the notes into Merlin shares before Innopac's offer lapsed.

This complicates matters.

Why would Merlin Diamonds issue convertible notes to Neo Kim Hock-directed ISR Investments Ltd during the takeover, only to not convert them into Merlin Diamonds shares?

On the other hand, the Merlin shareprice kept falling, which in itself is odd when one might have expected the takeover to provide support to the stock.

So, converting into shares at 22 Australian cents when those shares were trading at 12 cents or so on the market doesn't make much commercial sense.

Except that those shares could have been tendered into the offer, which would have secured 1.67 Innopac shares per Merlin Diamonds shares.

At last Friday's share price that would have equated to around 15 cents per Innopac share, above the 11.7 cents Innopac stock was trading at.

So, it seems reasonable that ISR Investments didn't convert its notes into shares, when those shares would have been priced above the market.

But this would have applied to all shares tendered into the takeover. They were cheaper to buy on the market.

Question

8. Did ASIC know the owners of ISR Investments Ltd?

The convertible notes issued to ISR Investments Ltd might be of interest to ASIC.

First, it needs to check if Innopac disclosed the interest of Innopac's controlling shareholder(s) in ISR Investments Ltd when it applied to the commission to extend the takeover offer to the convertible notes.

Question

9. Would ISR Investments Ltd be ever allowed to convert the notes into Merlin shares?

ISR Investments Ltd might have not converted the notes into Merlin shares yet, but it still has the right to convert them any time before June 7, 2014.

But if ISR Investments Ltd belongs to the shareholders/promoters/insiders of Innopac, would it not be seen as acting in concert with the six Singaporean businessmen who own a 63% stake in Merlin Diamonds?

If ISR Investments Ltd successfully converts the notes into Merlin Diamonds' shares, Innopac's shareholders/promoters/insiders would own about a 67% stake in Merlin Diamonds.

Question

10. Is Innopac really dis-interested in Merlin Diamonds even after the takeover offer has lapsed?

In the SGX announcement, Innopac claims it 'no longer has any interest in any Merlin shares'.

But then, six of its promoters/shareholders/insiders own a direct 63% stake in Merlin Diamonds.

Also, ISR Investments Ltd – possibly a company related to Innopac – owns A$8 mln worth of convertible notes of Merlin Diamonds.

Question

11. Why was Joseph Gutnick omitted from the top 20 shareholders list?

In the 2012 annual report (page 87), Joseph Gutnick is missing from the list of top twenty shareholders of Innopac Holdings Ltd as at April 1, 2013.

But on the same page, Innopac acknowledges Mr Gutnick as a substantial shareholder of the company with a 10.35% stake as at April 1.

A 10.35% stake makes Mr Gutnick the largest shareholder of Innopac.

So, why is Mr Gutnick's name missing from the list of top twenty shareholders of Innopac?

Question

12. Who sold a 10.35% stake to Mr Gutnick?

Mr Gutnick cannot buy overnight a 10.35% stake in Innopac from the market.

If the substantial shareholders of Innopac didn't, who else sold so many shares to Mr Gutnick?

We have sent these questions to Innopac and Mr Gutnick's office to invite them for an on-camera interview, and/or seek their written response.

Sofar, we have not had a reply (which is why you are seeing this message).


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