We look at the strange events at Value Convergence (0821) where Melco (0200) is selling its controlling stake at $1.92 before a massive dilutive CB issue at $1.00, a third of which is going to China Fortune (0290). Shareholders should vote against the bond issue, and bond subscribers and their associates should be prohibited from voting any shares they hold.

Value Divergence
21 September 2009

What strange goings on at Value Convergence Holdings Ltd (VC, 0821) currently (but not for long) controlled by Melco International Development Ltd (Melco, 0200) which in turn is controlled by casino tycoonlet Lawrence Ho Yau Lung.

First, on 8-Sep-09, VC announced that it had conditionally agreed to place HK$300m of 2-year 1% convertible bonds via China Everbright Securities (HK) Ltd. The bonds are convertible at $1.00 per share, and if converted in the first year, the converting holder gets an option to subscribe an equal amount of bonds to replace them. Consequently up to 600m new shares could be issued, equivalent to a whopping 161.65% of the existing issued share capital. The whole deal is conditional on shareholders' approval at a meeting yet to be convened.

At 30-Jun-09, VC had net tangible assets of HK$609.1m, or about $1.64 per share. So the bond conversions at $1 would be highly dilutive to NAV. Interestingly, although the placing commission on the initial $300m issue is only 1%, VC only expects net proceeds of $285m, so there are other fees and expenses of $12m or 4%, which seems excessive. The pro forma NTA of $1194m (assuming all 600m shares are issued) amounts to about $1.23 per share.

Despite that, on resumption of trading on 9-Sep-09, the stock jumped 91.8% from $0.98 to $1.88, and closed on Friday (18-Sep-09) at $2.05.

VC announced on Friday that it had "no fewer than six" subscribers for the first $300m of bonds. It didn't name the subscribers, but one of them is China Fortune Group Ltd (0290) which announced that it is buying $100m, or one third of the issue. That company featured in a series of articles on Webb-site.com in June and July.

Also on Friday, Melco announced that it had agreed with Kim Eng Securities (Hong Kong) Ltd as agent to place its entire 43.24% stake (160.9m shares) in VC into the market on a best efforts basis at $1.92 per share, starting today, 21-Sep-09. This is even before the shareholders' meeting to consider the proposed bond issue.

Now, think about it. Why would investors buy existing shares at $1.92 per share and then vote to approve a bond issue convertible at $1.00 per share? Surely it would make more sense for the new shareholders to vote against the bond issue. Unless, of course, the new owners had also been allocated a chunk of the bond issue, in which case they would be voting to approve their own deal. Under the Listing Rules, as long as a placee holds less than 10% of VC, it is not a connected person and can vote, unless the Stock Exchange says otherwise.

But then, what would be happening? If a purchaser in the share placing has also been allocated bonds which he/it converts, then the average purchase price per share will be lower. The weighted average of the 600m shares under the bond issue and the 160.9m shares in the placing is about $1.19 per share. Melco gets out at $1.92, a premium to NAV and a huge premium to the $0.98 price before the proposed bond issue was announced, but VC only gets $1 per share, diluting the NAV of other shareholders.

It appears that the interests of Melco and VC may be diverging here. The Stock Exchange should, at the very least, require disclosure of whether any of the subscribers in the bond issue, or their respective associates, are buying shares in the sale by Melco, and if so, prohibit them from voting on the bond issue. Webb-site.com urges other shareholders to vote against the bond issue when the time comes.

© Webb-site.com, 2009

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