Thai Beverage

CIMB Research on 27 Sept 2012

THAI Bev/TCC Assets announced that they will vote against the proposed capital reduction at today's Fraser & Neave (F&N) EGM. We believe this is a strategic move. The move might seem strange as Thai Bev can receive $1.2 billion of proceeds and bring down its current 1.4x net gearing to 1.0x. Voting down the move is a negative for de-gearing, but we believe there are two possible motivations behind the nay-vote.

First, Charoen could be trying to "force" shareholders into accepting his $8.88 offer. With Thai Bev/TCC Assets's vote against the capital reduction, F&N shareholders are left with accepting his $8.88 offer to realise returns or run the risk of F&N's share price collapsing (without the backing of a capital reduction) if they let his offer lapse. This could encourage F&N shareholders to accept his offer when the offer documents go out soon.

Second, Charoen could be eyeing a greater portion of the cash from the Asia Pacific Breweries (APB) sale. If the capital reduction goes through today, he stands to receive only 30.4 per cent of the cash ($1.2 billion). However, if TCC Assets successfully mops up more F&N shares or gains control over F&N, he will be entitled to a greater proportion of this cash and could even propose a larger payout, which would go some way in financing the F&N takeover.

We remain positive on the stock as Thai Bev stands to reap strategic benefits if TCC Assets succeeds with its F&N offer. We highlight that the current share price, even after the run-up year to date, does not fully reflect the value of its spirits business, let alone the full sum-of-parts.

We maintain "outperform" with no change to earnings estimates or our target price of $0.60. The successful takeover of F&N by TCC Assets is the next catalyst.

OUTPERFORM