A $1.7 billion bid for Malaysia's two main KFC fast food franchisees faces a growing chorus of opposition from investors challenging the terms of the offer that is nearly a year old and now looks to them badly undervalued.
A showdown is looming on November 5 and 6, when shareholders vote on the deal. Some investors contacted by Reuters said they planned to vote against the bid but it was not clear if they had enough firepower to do so.
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The bid for KFC Holdings (Malaysia) Bhd and QSR Brands Bhd was made last December by the investment arm of Malaysia's Johor state and CVC Capital Partners. The Employee Provident Fund joined the consortium in May.
But it was only in October that the companies called extraordinary general meetings. They have not explained the delay.
It is a long enough period, opposing shareholders argue, to mean that the bid price no longer represents the true value of the companies after what has been a prolonged retail sector boom, with prospects for it to continue.
What is not clear is whether those minority shareholders can muster enough support to prevent its backers winning the 75 percent of the votes they need to pass the acquisition.
But they may be helped by the fact that Johor Corp, top shareholder of both KFC and QSR, is not eligible to vote on the deal because it made the offer. Johor Corp and related parties own nearly half of KFC and about 60 percent of QSR.
Share prices in the two firms have hovered around last December's bid price.
In the same period, shares in other Malaysian consumer companies have soared as much as 70 percent as household spending has jumped, helped by generous government handouts ahead of a hotly contested national election.
"Comparing the companies with their peers based on last year's multiples is not relevant," said Jonathan Foster, Singapore-based director of global special situations at Religare Capital Markets. Religare does not own shares in either of the companies.
"If it is based on current multiples, KFC and QSR are quite undervalued."
Independent advisers for both KFC and QSR have recommended shareholders accept the offer.
Also, shares of the two companies trade at a discount of just about 3 percent to the offer prices. That suggests the market expects the deal to go through. A discount of 15 percent or more, known as a merger arbitrage spread, signals investors expect a deal to fail.
Reuters contacted eight shareholders representing around 38 percent of the total shares outstanding of KFC and 16 percent in QSR.
Two said they intended to vote against the proposal and one planned to vote in favor for the lack of a better alternative. The rest declined to comment.
The two holders intending to vote against the deal are based outside Malaysia and represent about 5 percent of KFC shares and 3 percent of QSR.
They said both companies had stopped paying dividends since receiving the offer last December, the negotiations had dragged on too long and too little information was shared with minority shareholders.
QSR and Johor did not respond to requests for comment. CVC declined to comment. A KFC official said shareholders will have the opportunity to voice their concerns at the meetings, scheduled for November 5 and 6.
Malaysian consumer stocks have enjoyed a strong run this year as pre-election government giveaways boosted domestic spending.
Nestle (Malaysia) Bhd has risen about 23 percent to date, while Berjaya Food Bhd and Oldtown Bhd , have risen between 60 percent and 70 percent this year, benefitting from strong domestic consumption and solid economic growth.
Shares of KFC and QSR's sector peers are up an average of 28 percent this year, compared with a 9 percent rise in the broader index , according to Thomson Reuters data. By contrast, KFC's shares are up 2 percent and QSR's 1 percent.
Both companies lag on a current price-to-earnings ratio basis. Berjaya Food and Oldtown trade at 23.50 times and 14.68 times, respectively, more than double where they were last December when the KFC franchisees received their takeover bids.
($1 = 3.0460 Malaysian ringgits)
(Additional Reporting by Al-Zaquan Amer Hamzah and Anuradha Raghu in Kuala Lumpur, Stephen Aldred and Denny Thomas in Hong Kong; Editing by Michael Flaherty and Jonathan Thatcher)