OVER the weekend, a Deutsche Bank-led consortium bought 54.7 per cent of shipping firm Jaya Holdings for $202.6 million, thus triggering a mandatory offer for the rest of Jaya's shares at 48 cents each.

 

The market yesterday reacted in negative fashion by driving Jaya's shares down eight cents or 12 per cent to 58 cents on a volume of 13.5 million, indicating that investors are not overly enamoured with the deal. Clearly, if the new owners are to protect the value of their investment and to win the trust of the market and shareholders, there are important questions that need to be answered.

A likely reason for yesterday's selling is concern over what the future holds under the new owners, given that the current management's position in the takeover has not been clarified.

Moreover, the consortium is led by Deutsche's hedge fund Cathay Asset Management and includes other hedge funds Linden Capital, Orchard Capital and Octavian Advisors. Hedge funds, the market believes, are generally not reputed for being long-term players and could well turn around and sell in the short-term if conditions are right. Quite understandably then and given the absence of sufficient clarity from the new major shareholders, Jaya's shares were sold off yesterday.

Continuity essential

At their peak, Jaya's shares sold for above $2 so given that the company has been extensively restructured and is now profitable, a share price recovery of some description can reasonably be expected. If there is to be a recovery however, continuity is essential - of operations, of existing businesses and most importantly, of management.

However, CAM's statement over the weekend only stated that it and its partners are looking forward to Jaya continuing its existing business and that Jaya looks well-positioned in its market segment but was silent on what relationship the new owners have with Jaya's management.

Is the relationship cordial and if so, will the current management stay and provide the continuity that the market appears to be looking for? Alternatively, if management departs en masse, is there a contingency plan in place, in the form of a suitably-qualified operating partner who can run the business in the interim?

A few other observations are also possible. One is that in a post-sub- prime climate where investment banks are supposed to rein in their risk-taking, it's interesting that Deutsche sees it fit to be at the helm of a large, potentially risky proprietary position.

Hefty discount

It could be that the bank views risk connected to this purchase to be minimal since its entry point is significantly lower than the market price of 66 cents at the time of the announcement. If so, then this leads to another interesting issue - should the seller have held out for a better price?

In this case, the seller was the official receiver (OR) for the stake that was owned by private equity firm Affinity Equity Partners, so it might be argued that like any OR, it sees its primary responsibility as simply raising as much cash as possible as quickly as possible.

And even at a hefty 27.3 per cent discount to the market price, the sum involved of $202.6 million is not insubstantial so it could be that the OR decided that acceptance now is better than waiting indefinitely for an improved offer from someone else later.

Yet Jaya shareholders might argue that their position has been severely disadvantaged by a sale at such a hefty discount. So the question then arises - should ORs bear in mind the welfare of various stakeholders when selling off assets? Or is expediency the overriding criteria?

No matter, since the deal has been struck the most pressing issue is for Jaya's new majority shareholders and management to provide greater clarity as to their plans for the future and what management's role is in those plans. A statement to this effect as soon as possible is perhaps what is needed to prevent the shares from sliding further.