Indofood to take over Minzhong. We mentioned in an August note that Indofood may take over Minzhong if it is that confident in its investment and it appears that is the course they will take. China Minzhong’s rebuttal was announced on 1 Sep and it was robust in our view, but by itself would probably not have been enough to immediately ease shareholder concerns. Regardless, the rebuttal has since been superseded by more recent events, namely the offer that is now on the table for Minzhong at SGD1.12. Indofood first crossed over the 30% threshold yesterday morning (2 Sep) by buying 25.6m shares or 3.9%, taking them from 29.3% to 33.5%, and it will now launch a MGO for the rest. (Latest: Indofood in total bought 69.5m shares or 10.6%, taking them to 44.1%.) Uncertainties and approvals remain hence our rating is still under review. We outline some scenarios below.

Accept the offer – easiest but other opportunities. So now what? In our view, there will be plenty of people saying accept the offer, run for the hills and count yourself lucky. After yesterday’s unprecedented rebound the stock is now at the last six months’ average and we believe most investors should be in the money or at the edge of it. Given the still considerable uncertainties, accepting the offer would be the easiest thing to do, but there are other dynamics to consider. Hence, from now on, we will strive to present all sides of the equation, recognising that there will be some investors (probably most) that will want to get out BUT there may still be some who would want to stay in the game.

So why should we hang on? Well, for one thing, Glaucus likely gave Indofood a rare opportunity to launch a takeover at an artificially low price and frankly, Minzhong probably also asked Indofood for help. So if one is willing to wait it out, there could be more upside given Minzhong’s cheap valuation (0.7x NTA and 4x PE) now. Indofood is unlikely to give Minzhong a free lunch. In our view, it is likely to push Minzhong to cut capex, improve cashflow, increase transparency and corporate governance, and very likely have a fixed dividend policy (Indofood has a 40% payout policy) so that it can recoup its money as soon as possible. If all this plays out, Minzhong could still be worth SGD1.50, which was where consensus was clustered before Glaucus.

Source: Maybank Kim Eng Research - 3 Sep 2013