Hap Seng Plantations Holdings Bhd is proposing to acquire a controlling stake in Kretam Holdings Bhd via two corporate exercises valued at a combined RM1.18billion. Under the exercises, Hap Seng Plantations will increase its landbank and venture downstream into the edible oil and biodiesel segment, while Kretam will be able to resolve its longstanding shareholder spread issue.

In a filing with Bursa Malaysia yesterday, Kretam said chief executive officer and controlling shareholder Datuk Lim Nyuk Sang @ Freddy Lim, had entered into two agreements with Hap Seng Plantations to divest his direct and indirect shareholdings in Kretam.

The first is a conditional share sale agreement (SSA) between Lim and Hap Seng Plantations for the sale of 779.34 million Kretam shares, or a 33.5% equity interest in Kretam for RM716.99mil cash or 92 sen per Kretam share.

The second is a conditional SSA between Santraprise Sdn Bhd (a company controlled by Lim) and Hap Seng Plantations for the sale of 500.86 million Kretam shares, representing a 21.5% equity interest in Kretam for RM460.79mil cash or 92 sen per Kretam share.

Both plantation companies were suspended yesterday morning. They will resume trading at 9am today.

Kretam's last traded price was 84 sen, while Hap Seng Plantations was last traded at RM2.56. Kretam has a market capitalisation of RM1.95bil, while the latter is capitalised at RM2.05bil.

Should the above conditional SSAs become unconditional, it will result in Hap Seng Plantations emerging as a 55% shareholder in Kretam and thereby triggering a mandatory general offer (MGO) for the remaining issued shares in Kretam not already owned by Hap Seng Plantations.

Shareholder approval is needed for both the purchase of the 1.28 billion Kretam shares from the vendor as well as to undertake the proposed MGO. Kretam has had a shareholding issue since December 2016, as it has not been able to fulfil the 25% public spread requirement. The public shareholding of the company, which is largely owned by Lim, has fallen to 21.7% and the company has not rectified the problem despite several extensions given to it by Bursa Malaysia.

As at Feb 21, Lim had a direct and indirect interest of 1.13 billion shares and 500.86 million shares in Kretam, respectively.

Assuming the completion of both the SSAs, Lim's interest in Kretam will reduce to 355.41 million shares or a 15.3% stake.

"The board wishes to highlight that there is no certainty that the SSAs will become unconditional or that there will be an offer. Shareholders are advised to exercise caution when dealing in the shares of the company" said Kretam in the filing.

Meanwhile, in its filing with the local bourse, Hap Seng Plantations said that the acquisition was in line with its objective to increase its plantation landbank in keeping with its long-term strategy.

Hap Seng Plantations' current landbank stands at 40,000ha of which about 36,000ha are planted with oil palm. It has a total of 16 estates and four oil mills, all located in Sabah - notably in the Lahad Datu, Tawau and Kota Marudu regions.

"Upon completion of the proposed acquisition, the total plantation landbank and planted area of the group is expected to increase to 23,865ha or 59.2% and 19,623ha or 54.3%, respectively" said Hap Seng Plantations.

"The estates of Kretam and its subsidiaries in Sandakan, Lahad Datu and Tawau are also strategically located close to Hap Seng Plantations' existing estates.

Hap Seng Plantations' familiarity with these areas will facilitate the integration, management and operations of Kretam's estates after the completion of the proposed acquisition, and thus potentially achieve greater economies of scale" it said.

The proposed acquisition is also expected to improve the age profile of Hap Seng group's oil palm estates, as the plantation land of the Kretam group comprises mainly of oil palm estates that are within the prime age of between 11 and 19 years.

"With the capacity of Kretam's existing refinery of about 1,500 tonnes per day, the proposed acquisition will also enable the company to venture downstream into the production and sale of edible oils and biodiesel, while extending its value chain and operational efficiency" it added.