Innopac Holdings Limited - Why did Merlin Diamond's major shareholder sell out, rather than accept the takeover bid he was recommending?


28/6/2013 – Innopac Holding's S$76 mln takeover bid for Australian Securities Exchange (ASX) listed Merlin Diamonds has been extended to July 12 – but the main proponent of the deal sold out of the company shortly after announcing it on January 31.

Innopac will issue 1.67 new shares in Innopac for every Merlin Diamonds Ltd share.

Merlin Diamonds owns the Merlin Diamond Mine Project, which is apparently one of only three diamond mines in Australia.

Innopac's Managing Director and CEO, Mr Wong Chin Yong, said the offer would enhance shareholder value and make Innopac the first and only diamond miner listed in Singapore, and probably in Asia.

At the time of the acquisition, Legend International Holdings Inc was the largest shareholder of Merlin Diamonds, with a more than 40% stake.

Legend International belongs to Mr Joseph Gutnick, the Chairman and CEO of Merlin Diamonds.

According to an announcement on ASX, Mr Gutnick controls Renika Pty Ltd and Chabad House of Caulfield Pty Ltd, which own a 28% stake in Legend International as at January 29.

He was the largest shareholder of Legend International before he sold a significant stake to IFFCO in July 2008 (Source) and recently, allotted placement shares to Regals Fund LP (Source).

According to Bloomberg Businessweek, Mr Gutnick has been the Chairman, President and CEO of Legend International since 2004.

Therefore, it is clear that Mr Gutnick was the force behind ASX-listed Merlin Diamonds Ltd.

1. Why did Mr Gutnick not himself accept the offer he was recommending to shareholders?

On April 2, 2013, Merlin Diamonds released Innopac's Bidder's Document for acquiring 100% shares of Merlin Diamonds by June 28, 2013.

The Bidder's Document highlights on several instances that Innopac's offer for acquiring Merlin Diamonds' shares was " unanimously recommended by Merlin's Directors" .

According to page 14 of the Bidder's Document (point 2.5), " All Merlin Directors who own or control Merlin Shares have confirmed they will accept the Offer in respect of the Merlin shares they own or control, in the absence of Superior Proposal" .

But by then, Mr Gutnick had already sold out.

Legend International sold 59 mln shares or a 37% stake for A$0.20-A$0.22 per share, raising A$12.5 mln.

After this sale, Legend International's stake in Merlin Diamonds dropped to less than 1%.

Naturally, all Merlin Diamonds shareholders had the opportunity to sell their holdings, rather than accept Innopac's offer.

But it is curious that the Chairman and CEO of Merlin Diamonds would do so, while recommending the takeover to shareholders.

2. Why did Legend International sell shares in Merlin Diamonds for less than the takeover price?

Not only did Mr Gutnick's Legend International sell almost all of Merlin Diamonds' stake just days before Innopac launched its formal bid for the company.

But it did so at A$0.20-A$0.22 per share, despite a significantly higher offer of A$0.28/share from Innopac.

3. When did Mr Gutnick actually buy a 12% stake in Innopac?


Soon after the announcement of the acquisition of Merlin Diamonds by Innopac, Mr Gutnick became the largest shareholder of Innopac through purchases on the open market.

He bought shares on four occasions during February – 200 mln shares on the 5th, 100 mln shares on the 6th, 220,000 shares on the 18th, and 1 mln shares on the 21st.

The problem is: we can't find evidence of those trades on those dates.

Innopac's total traded volume on the SGX was not that high on days when Mr Gutnick bought large quantities.

The total traded volume disclosed by the exchange was 89.5 mln on February 5 and 72.9 mln shares on February 6.

Perhaps Mr Gutnick bought shares in 'off-market' transactions on February 5 and 6.

But for that to happen, some of the existing substantial shareholders of Innopac would have had to sell these shares to him.

None of them have announced sales of shares so far in 2013.

Therefore this makes us wonder if Mr Gutnick bought such large quantities of Innopac's shares at another time.

Perhaps in January when Innopac's stock price surged three-fold?

Total traded volume in January was as high as 400 mln shares traded on January 17.

But that would have been before the deal was announced on January 31.

We invited Mr Gutnick to provide an answer to this question of when he actually bought the Innopac shares, but he declined to do so at this time.

We are not making any allegations due to the absence of this crucial piece of the puzzle, but if the shares had indeed been bought before 31 January, would not insider trading regulations be relevant or come into play?

If the shares were bought after 31 January, then when?

We have not been given the answer to this question, and we are sure investors would like to know.

4. Who sold a 12% stake in Innopac to Mr Gutnick?

Since all the transactions appear to have been executed 'off-market', it is obvious that the seller(s) must have either known him or otherwise somehow been introduced to him or his brokers or agents for the sale to take place.

And given that he bought these shares less than a month after the deal was announced, it makes us wonder if the sellers(s) were none other than the controlling shareholders of Innopac.

5. Why did Innopac's insiders buy shares in Merlin Diamonds immediately before and after the announcement of the deal?

Edwin Sugiarto, the largest shareholder and Chairman of SGX-listed Annica Holdings Ltd, bought 9 mln shares (a 5.12% stake) in Merlin Diamonds on January 25, less than a week before deal's announcement on January 31.

However, he served notice to ASX only on March 20, 2013.

Now, Annica Holdings Ltd and Innopac Holdings Ltd have been in a lengthy relationship.

Innopac, via its subsidiary Jadensworth Holdings Ltd, is a shareholder of Annica.

Not just that, Wong Chin Yong – the CEO and a shareholder of Innopac – has been a shareholder of Annica since 2010.

Perhaps it is pure coincidence, and in the absence of any answers, it is not for us to make any allegations.

But the relationship between Innopac and Annica is sufficient for a reasonable person to wonder: On what basis or information or for what commercial objective did Annica's Chairman buy shares in Merlin Diamonds shortly before Innopac announced a takeover bid for it?

Mr Sugiarto was not the only person close to Innopac who bought substantial stake in Merlin Diamonds before the deal was announced.

Mr Vernon Khoo Tiam Hock, former MD of Kuantan Flour Mills Berhad, bought 9 mln shares (5.12% stake) of Merlin Diamonds on December 31, 2012.

Yet again, the change in substantial shareholdings was announced on ASX only in March.

Moreover, the date of the announcement was not stated along with his signature.

We shall explore Kuantan Flour Mills Bhd's connection a bit later.

Mr Lee Chai Huat bought 24 mln shares (a 13.65% stake) in Merlin Diamonds, through Newton Centre Development Ltd, on January 17.

But that was announced almost a month later, on February 14.

He also bought placement shares in IPCO International on April 13, 2011 and also in Innopac Holdings on April 7, 2010.

Therefore that makes him very close to people at IPCO and Innopac.

Lee Chai Huat has served as an assistant to Dato' John Soh Chee Wen about 2000 when John Soh was facing charges regarding Omega Securities scandal in Malaysia.

In March, three other individuals close to Innopac bought Merlin Diamonds' shares.

Goh Hin Calm, Senior Finance and Admin Manager at IPCO International Ltd, bought 13 mln shares (a 7.39% stake) in Merlin Diamonds on March 8, but announced this only on March 21.

IPCO International Ltd is one of the substantial shareholders of Innopac.

Goh Hin Calm's proximity to Innopac is also evident from the fact that he served the notice of change in shareholding interest, on behalf of IPCO International, to Innopac on January 15, 2013.

Gary Tan Boon Kiat is another such individual who bought 22 mln shares (a 12.51% stake) in Merlin Diamonds on March 8, with an announcement following two weeks later on March 21.

According to Reuters, Gary Tan Boon Kiat owns a 2.41% stake in Innopac and a 6.41% stake in Kuantan Flour Mills Bhd.

Lim Kuan Yew bought 21.6 mln shares (a 12.29% stake) in Merlin Diamonds on March 4, 2013, with an announcement more than a month later on April 24.

Lim Kuan Yew is an existing shareholder of Innopac.

Together - Edwin Sugiarto, Vernon Khoo Tiam, Goh Hin Calm, Gary Tan Boon Kiat, Lim Kuan Yew and Lee Chai Huat – bought 98.6 mln shares or about a 63% stake – in Merlin Diamonds from December 31, 2012 to March 21, 2013 for A$0.20-A$0.22 per share, totalling A$20.7 mln in cash.

Such a significant stake enables them to ensure that Merlin Diamonds' shareholders do not vote down Innopac's offer in their EGM.

Unless, of course, they abstain from voting at the EGM due to conflict of interest.

6. How could these Innopac insiders benefit from acquiring substantial stakes in Merlin Diamonds?

“Now, we're not making any allegations of any kind, especially in the absence of complete disclosures or information, but if we had to come up with hypothetical reasons which make any sense of this puzzle , we can think of two possibilities – short-selling of Innopac's shares and use of the 'share sale facility'.

First, Innopac's stock price was around S$0.20 throughout the month of March.

Therefore, for short-sellers to profit, they will have to buy the stock for less.

This makes substantial acquisition of shares in Merlin Diamonds important.

The following illustration, as mentioned before, is hypothetical as we don't know how many shares of Innopac were actually short-sold, if at all.

This group of informed investors/insiders – Edwin Sugiarto, Vernon Khoo Tiam Hock, Goh Hin Calm, Gary Tan Boon Kiat, Lim Kuan Yew, Lee Chai Huat – bought 98.6 mln shares in Merlin Diamonds for A$20.7 mln.

These 98.6 mln Merlin Diamonds' shares will be converted into 164.66 mln Innopac shares (at Innopac's offer of 1.67 Innopac shares for every Merlin Diamonds share).

Simply put: these people bought 164.66 mln Innopac shares for A$20.7 mln or S$26.86 mln (A$1=S$1.2974).

Therefore, cost of acquisition of 164.66 mln Innopac shares works out to be S$0.16/share.

So, here it is – shares short-sold on SGX at about S$0.20/share have already been bought back on ASX (via substantial acquisitions in Merlin Diamonds) for S$0.16/share – making a neat profit of S$0.04/share. Or, a total profit of S$6.59 mln on 164.66 mln Innopac shares.

This way, investors of Innopac can profit from the short-selling Innopac's shares on SGX and buying Merlin Diamonds' shares on ASX.

Alternatively, these informed investors of Innopac might also profit by opting for a 'share sale facility' on completion of acquisition of Merlin Diamonds' shares by Innopac.

According to the 'share sale facility' (as described in Bidder's Document), the shareholders of Merlin Diamonds can opt for cash payment on completion of the deal.

In such a situation, those Innopac shares allotted to such Merlin shareholders will be sold in the open market on SGX and the cash proceeds paid out.

In such a case, these individuals will be in profit if the Innopac shares are sold at any price above S$0.16/share.

7. Why did Mr Gutnick buy 300 mln shares in Innopac directly on SGX, when he could have bought the shares of Merlin Diamonds on the ASX and converted them into Innopac's shares?

Mr Gutnick's Legend International raised A$12.5 mln in cash from the sale of Merlin shares to Innopac's insiders.

Meantime, Innopac's offer to issue 1.67 Innopac shares for every share in Merlin Diamonds is a non-cash offer.

Had he chosen to accept Innopac's offer, he would have to wait for at least three months (as Innopac's offer ends June 28) before he could sell newly allotted shares in Innopac to raise cash.

One of the advantages of buying a 12% stake in Innopac in February is that Mr Gutnick gets to vote at the EGM on Innopac's proposal to acquire Merlin Diamonds.

Unless he abstains from voting due to conflict of interest.

We sent these questions to Mr Gutnick to invite him for an on-camera recorded interview.

His office replied " Thank you for your email. Joseph sends his apologies that he is not currently available for any interviews."

We then sought written replies to our questions.

His office replied " Joseph has advised it is not appropriate to give any interviews at all whilst the takeover is on. He will not be holding any interviews at all at this time."

We extended an open invitation for Mr Gutnick to take part in an interview.

All these things remain a puzzle, and it would be great for investors to know the answers to these questions: there could very well be good answers and justifications to the questions which is reasonable for us and the investors to ask on this interesting deal.

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