Hume Industries (Malaysia) Bhd’s share price staged a minor rally after it announced that its major shareholder proposes to take it private with a voluntary general offer at RM4.30 a share. The stock rose 10 sen to close at a 19-month high of RM4.25 last Friday.

While minority shareholders may seem to have little to gain from the RM4.30 offer for Hume, which is rich in financial assets, with the privatisation of Hume at RM4.30 a share, the company’s executive chairman Tan Sri Quek Leng Chan, will likely emerge a big winner from the deal. This is largely because Quek would then have full control of cash-rich Hume.

On Jan 14, Spectrum Arrangement Sdn Bhd, a wholly-owned subsidiary of Hong Leong Co (M) Bhd, launched a takeover offer for the remaining shares of Hume for RM4.30 a share. Hong Leong Co is Hong Leong Malaysia group’s ultimate holding company, in which Quek is a director and substantial shareholder. According to the announcement, Spectrum holds 118.8 million shares in Hume, representing a stake of about 64.94% in the company.

Parties acting in concert (PACs) with Spectrum include Hong Leong Co, Quek, Soft Portfolio Sdn Bhd, Assets Nominee (Tempatan) Sdn Bhd and Hong Leong Assurance Bhd. The PACs hold a collective stake of about 6.07%, comprising 11.1 million shares. Meanwhile, Hume’s treasury shares totalled 8.3 million as of Nov 20, 2009.

As Hume has an issue base of 191.2 million shares outstanding, Spectrum and the PACs would only have to acquire the remaining 53.0 million shares or a 27.7% stake for a total of RM227.9 million to be paid in cash. Spectrum says it has sufficient funds to take Hume private.

Hume manufactures concrete products and premix road surfaces. The soft economic environment saw the company swimming in losses for FY2009 ended June 30. It posted a net loss of RM22 million on the back of RM590 million in revenue, down 22.3% from revenue of RM759 million for FY2008.

For the first quarter ended Sept 30, 2009, the company showed a net profit of RM24 million against RM133.4 million in revenue compared to a net profit of RM90.2 million and revenue of RM208.3 million a year earlier.

However, Hume’s allure lies in its cash pile, which stood at RM349.3 million as at end Sept 30, 2009, which translates to RM1.83 per share. Furthermore, the company has little debt, with total borrowings at only RM15.3 million. Its net asset value per share at the end of 1QFY2010 was RM5.04.

Additionally, Hume is the single largest shareholder in main board-listed steel manufacturer Southern Steel Bhd. Going by Southern Steel’s closing price of RM2.24 last Friday, Hume’s 41.46% equity stake in the company was valued at RM389.4 million.

For the third quarter ended Sept 30, 2009, Southern Steel posted a net profit of RM34.6 million, a drop of 47.3% from the RM65.7 million in the previous corresponding period. Revenue for the quarter fell 38.8% to RM561.9 million, from RM918.4 million previously. Higher sales volume and average selling prices, as well as lower raw material costs, resulted in a turnaround in operating margin to 8% in 3Q2009.

The stock hit a 52-week high of RM2.36 last Friday following the announcement of the general offer for Hume. According to Bloomberg, there are four “buy” calls on Southern Steel. In a recent research report, Standard & Poor’s (S&P), which has a strong buy call on the company, said Southern Steel’s quarterly results indicate that it is on track for a recovery.

For the collective nine months, Southern Steel posted a net loss of RM43.5 million with revenue of RM1.4 billion, which was down 47.2% from the previous corresponding period. Nonetheless, S&P expects its profit margin to expand in 2010 as the improving economy could see better sales. Southern Steel trades at less than six times its forecast 2010 earnings, which gives room for further upside, the research firm said.

At a glance, coughing out RM227.9 million in cash seems like a small price for Quek to have complete control of Hume’s RM349.3 million cash and the Southern Steel stake that is valued at RM389.4 million.

The offer document will be posted to shareholders by Feb 4. In order for Spectrum to trigger a compulsory acquisition of all Hume shares, holders of at least 90% of the outstanding shares or 47.7 million shares, must accept the offer.

While it remains to be seen if the minority shareholders will indeed sink their teeth into the offer, it is unlikely that Quek will offer a more generous deal. After all, Quek, the tycoon behind the Hong Leong Group of companies, is known not to pay high prices for his deals. As it is, Quek only makes a move when it will be a big win for him. From the look of things, privatising Hume will be another feather in his cap.

This article appeared in Corporate page, The Edge Malaysia, Issue 789, Jan 18-24, 2010