• BreadTalk's 4Q19 below, dragged by China Bakery business.
• No final dividend declared.
• Founders and Minor International are offering to privatise BreadTalk at S$0.77 in cash.
• Takeover Offer above our valuation, accept the offer.

4Q19 Disappoints, No Final Dividend Declared

• BreadTalk Group (SGX:CTN)'s 4Q19 earnings below estimates: Net loss of S$8.1m was below our estimates.
• Revenue grew 10.1% y-o-y to S$170m led by Restaurants, Food courts and 4orth division, mainly on higher outlet count. Bakery division’s revenue declined 2% y-o-y to S$68.9m affected by China outlets. Operating and pre-tax losses were S$18.3m and S$6.2m dragged by the Bakery Division which recorded pre-tax loss of S$10.1m.
• No final dividend was declared compared to 1 Sct final dividend in 4Q18.

Offer to Buy Out and Delist BreadTalk

Major shareholders looking to acquire all of BreadTalk and delist it at S$0.77:

• BreadTalk announced that founders George Quek and Katherine Lee together with Minor International are offering to acquire all the issued ordinary shares in BreadTalk that they collectively do not own at a price of S$0.77 through a voluntary conditional cash offer. All three parties collectively own 70.53%.
• The offer is conditional upon the offeror holding more than 90% of total shares in BreadTalk at the close of the offer period. There are plans to delist BreadTalk from the SGX should this condition be met.
• The reasons for the offer: The offer announcement cited cost of listing status, greater management flexibility and no necessity to access capital markets along with giving shareholders an opportunity to realise their investment as the rationale for the offer.

We Believe the Deal Makes Sense for Both the Offeror and Shareholders

• Offer premiums reasonable in view of shareholding structure. Based on our database of successful privatisations on the SGX over the years, average premiums across the last price, 1, 3, 6, 12-month VWAPs of above 25% would normally ensure privatisation success. We feel that the premium offered by
• BreadTalk, is close to the level that ensure success given BreadTalk’s sporadic shareholding structure. We therefore believe that is why the offeror did not state that the offer price is final and there will be no revision to the offer price.

Shareholding structure is in favour of the offeror.

• The advantage for the offeror at this offer premium is that the shareholding structure of BreadTalk is sporadic, with the second largest shareholder holding only a 4.99% stake based on shareholding structure listed on Bloomberg. As the second largest shareholder is way smaller, it is difficult for all the minority shareholders to collectively reject the S$0.77 offer to force the offeror to increase the offer price.

Why the offer makes sense for the offeror.

• At the offer price, BreadTalk’s market cap or equity valuation is S$434m. It would cost the offeror about S$130m to take out the remaining 30% shareholders. Once privatised, the offeror has 100% access to the balance sheet which has S$157.6m cash as of Dec 2019.
• Over the past five years, the business was able to generate operating cash of at least S$65m annually. The owners will enjoy full benefit of this cash after privatisation.

More advantages for the offeror with the 90% offer condition.

• As the offer condition is set at 90%, we can view this as an all or nothing situation. If acceptances result in the offeror owning below 90% of total shares, the offer is off and shareholders revert to status quo before the offer, even for shareholders that accepted the offer early.
• Once the offeror received acceptances to increase its shareholding to above 90%, it can invoke Rule 723 of the SGX listing manual to refuse to unwind the free float and suspend trading of shares as the free float is below 10%. At that point in time, the only way for shareholders to realise their investment would be to accept the offer. Most remaining shareholders would by then also accept the offer.
• Based on Section 215(1) of the Companies Act, if the offeror receives 90% acceptances of shares it does not own, and arrives at 97.05% shareholding, it can invoke compulsory acquisition on all remaining shareholders at the prevailing offer price to reach 100% shareholding.

Offer Is Above Our Valuation, Accept the Offer at S$0.77

• We recommend shareholders accept the offer. Operationally, BreadTalk is going through a difficult period especially its bakery business in China, which continues to be a drag. Furthermore, we believe Minor International have a longer-term investment horizon than minority shareholders.
• The near term outlook is not expected to be robust given COVID19 and the poor performance of China Bakery division. We reiterate that shareholders would unlikely be able to hold out for a higher offer price for reasons already mentioned above. The current offer is an opportunity for existing shareholders to exit the stock at an attractive valuation.
• At S$0.77, on our estimate, the PE for FY20F earnings based would be attractive at 33x.

Source: DBS Research - 25 Feb 2020