PJ Asset Management Urges the Share Swap Between TECO Electric and Machinery Co., Ltd. (1504.TT) and Walsin Lihwa Holding Co., Ltd. (1605.TT) to Undergo Shareholders' Consent
TAIPEI, Nov. 25 , 2020 /PRNewswire/ -- PJ Asset Management Company ("PJAM") issued a letter on November 21, 2020, cautioning all shareholders of TECO Electric and Machinery Co., Ltd. ("TECO" or "the Company", 1504.TT) with regard to the Company's proposed share swap transaction ("Transaction") with Walsin Lihwa Holding Co., Ltd. ("Walsin", 1605.TT). PJAM urges shareholders to support and join its request to submit the Transaction for approval at a shareholders' meeting. PJAM and its subsidiary, Jaryuan Investment Co. Ltd., together make up TECO's single largest shareholder, holding more than 27% of the Company's common stock.
To all TECO shareholders,
PJAM issued a letter on November 21, 2020, cautioning all shareholders of TECO with regard to the Company's proposed share swap transaction with Walsin. PJAM urges shareholders to support and join our request to submit the Transaction for approval at a shareholders' meeting. PJAM currently holds a significant 27% stake in TECO, following a steady rise that has been reported to regulators at each threshold. Our commitment to and focus on TECO's long-term growth compel us to act in the interest of all the Company's investors.
TECO announced on November 20, 2020, the formation of a strategic alliance with Walsin via a share swap in capital increase to jointly tap the markets of smart grid, smart manufacturing, and renewable energy. The cooperation, which has been ratified by both companies' boards of directors and will be submitted for approval by the Financial Supervisory Commission ("FSC"), is expected to be effective in January 2021. The Transaction would have also received consent by PJAM and all other shareholders if all the following concerns were adequately addressed – but they were not.
ROE and capital efficiency will worsen upon the capital increase
According to the agreement, Walsin will float 205,332,690 new shares, in exchange for 171,103,730 new shares of TECO, at a ratio of 1.00:0.83. As a result, Walsin will own an 8% stake in TECO, which in return will hold a 6% stake in the former. An 8% share dilution may seem insignificant by market standards, but PJAM calls investors' attention to the unexplained "undercurrents", such as the following:
1) TECO's board has taken no notable measures to improve the Company's ROE and capital efficiency, despite PJAM's recommendations submitted in its "Value Enhancement Plan" of March 2020. The pandemic impact was repeatedly mentioned in TECO's quarterly investors' meetings to excuse for lower-than-expected sales revenue and operating margin.
2) TECO has offered Walsin a major 27% discount by agreeing to a 1.00:0.83 share swap ratio. As both are listed companies with justifiable market prices, TECO might expose itself to potential impairment loss given the huge share exchange difference. This unprecedented favorable share swap ratio would deteriorate TECO's EPS and dividend payout in 2021, even before investors see any real benefit of the so-called strategic alliance, which may be felt only in years to come.
Lack of communication and transparency
PJAM was not aware of this major transaction until it was publicly announced on November 20. That is despite PJAM being TECO's single largest shareholder and having been promised that the Company's management team would ensure regular, open engagement. Furthermore, TECO just held its quarterly investors meeting on November 17, three days ahead of the announcement, yet disclosed no information about seeking any potential partnership or major inroads into green energy, energy management, and smart manufacturing. Meanwhile, one month ago, TECO's founder Huang talked up strong interest in building an agricultural park in southern Taiwan to enhance the purchasing power advantage of TECO's food enterprises vis-à-vis suppliers.
The 171 million capital increase shares are calculated at TWD5.44 billion based on TECO's latest net worth data and at TWD5.05 billion based on its November 20 closing share price (TWD29.55). Walsin's 205 million capital increase shares is calculated at TWD4.89 billion based on its latest net worth data and at TWD3.7 billion based on its November 20 closing share price (TWD18.00). Its share swap value gap is significantly inferior to TECO's, by well over 10% and 27% difference, respectively, and inconsistent with the market value or net worth value methodology commonly accepted by the market practices on share swap transactions. Despite its top 5 corporate governance ranking among Taiwan's listed companies, and to our disappointment, TECO offered no justification for the basis of its share swap methodology.
The abrupt announcement last Friday evening (November 20), followed by a short media conference, provided no detailed numeric explanation on the costs and benefits of its alliance, which appears to have been a hasty decision. After PJAM issued the November 21 counteractive statement, Chairman Sophia Chiu promptly visited our office to explain the rationale behind the strategic alliance. The Company subsequently issued a second shareholder letter on its website outlining the potential areas of cooperation with Walsin. While we appreciated Chairman Chiu's sincere and prompt efforts to communicate with PJAM, the Company's latest statement provided minimal substance. It conveyed no change or action on how to improve its ROE or capital efficiency, showing little foreseeable benefit to shareholders.
Another tactic to circumvent shareholders' scrutiny
Investors may recall that TECO at the last minute retracted its private placement proposal in May's shareholders meeting, pressured by the overwhelming opposition while soliciting foreign institutional investors' consent. With this Transaction, TECO has circumvented shareholders' scrutiny by seizing on a regulatory loophole. The purpose of the Company Act 156-3 is to allow a listed company to form a strategic alliance with another company via share swap if (a) it is within a fair percentage of outstanding shares and (b) its registered common shares amount can be approved through a board meeting without the need to submit a meeting resolution to shareholders. Unfortunately, this law has been misused by certain companies in recent years to introduce "a friendly partner" and intentionally dilute other shareholders' stakes, turning it into a so-called "white knight" clause. Questions around this practice remain on whether the invited partner can be truly valuable to the company, while the regulation offers companies an easy solution to bypass the high bar and scrutiny of shareholders.
The purpose of the Company Act 156-3 in Taiwan is no different from that of the private placement under the Securities and Exchange Act 43-6, only that the beneficiary company gains shares of the invited partner instead of cash. Ironically, the applications of both rules are subject to entirely different standards. The former can be approved by the board of directors, whereas the latter, normally offering a 20% discount to specific parties, shall be approved through a shareholders' meeting. Regardless of the extent of share dilution, PJAM strongly opposes TECO taking advantage of the Company Act 156-3 at an inferior discount to dilute the benefit to PJAM and all other existing shareholders. We insist that TECO submits this Transaction, along with a concrete cost and benefit analysis, to the next shareholders' meeting for resolution and consent prior to obtaining FSC approval.
Meanwhile, PJAM wishes to point out that ISS in TECO's Annual General Meeting in May suggested shareholders vote "YES" to TECO's Amendments to Articles of Association. ISS believed that private placement and public offering via a book-building process must be submitted for shareholder approval and shareholders will still be able to keep the company's capital raising plans in check. TECO's announcement on November 20, it now appears, validated PJAM's concern that TECO did have a way to bypass wider scrutiny in the AGM.
As Taiwan endeavors to compete under the highest standard of international corporate governance, this type of repeated abuse in applying the law shall call on the attention of the FSC to maintain an orderly and transparent equity market. We would like to see the FSC setting a precedence with the TECO-Walsin Transaction.
The original letter in Chinese can be found on PJAM's website:
We thank you for your attention to this matter. As TECO's largest shareholder, we remain vigilant and committed to working together with our fellow shareholders in favor of the long-term value of our investment.
PJ Asset Management
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