In 2002 Cemex made a hostile bid to take over the TCL Group offering $7.15 or US$1.17 per share for 100 per cent of TCL. As noted in earlier publications, the TCL board engaged the services of JP Morgan to carry out an independent valuation of the company's shares while Cemex engaged Salomon Smith Barney Inc, (SSB) to do their valuation report on TCL. The SSB report was released to TCL shareholders in July 2002 in an effort to convince them to accept Cemex's offer. It is interesting to note the differences 14 years apart:
�2 In 2002, Cemex's offer of $7.15 represented a firm value to EBITDA Multiple of 8.2x, whereas their 2016 offer is 5.6x.
�2 Cemex's 2002 offer represented a 90 per cent premium over what Cemex referred to as TCL's "unaffected stock price pre-Cemex offer". Assessing TCL's unaffected stock price is virtually impossible in the current scenario, but TCL's average share price from January 1, 2016, to the day before the announcement is $3.44 suggesting that Cemex's current offer represents only a 31 per cent premium.
�2 In 2002 SSB's "public companies" methodology gave a valuation range of $4.50 to $5.50 while their "precedent transactions" methodology gave a valuation range of $5.50 to $6.50 and Cemex offered $7.15 per share. In 2016, Deloitte's "public companies" methodology gave a valuation of $3.80 to $4.10 while their "precedent transactions" methodology gave a valuation range of $4.30 to $4.50 and Cemex offered $4.50 per share.
It is clear that in 2002, Cemex had to pull out all the stops to take over TCL for several reasons:
�2 Cemex had failed to impress the TCL board and management since becoming a 20 per cent shareholder in 1993.
�2 The OWTU did not support the loss of one of the "commanding heights" of the T&T economy to a foreign owner, especially when the company was profitable with tremendous potential for growth.
�2 TCL's by-laws contained a special provision of a 20 per cent cap on shareholding designed to ensure that TCL shares were widely held and for any takeover bid to be successful, more that 75 per cent of shareholders must agree to the offer price.
It is no secret that one of the Espinet-led board's top priorities was the removal of the 20 per cent cap on shareholding, which happened in February 2015. This left TCL shareholders as "price takers" in any takeover bid rather than "price makers". The Espinet-led board failed to see the strategic importance of holding on to the 20 per cent cap as it demanded a premium in any takeover attempt, either by Cemex or any other company. The board squandered the company's leverage in an ill-conceived rights issue, which appeared to be designed simply to give Cemex effective control of the company for $2.90 per share. Once Cemex takes over 75 per cent of TCL (plus eight per cent of Baleno), they can recover their entire investment in the rights issue by declaring a special dividend and recouping most of TCL's US$47 million in cash currently held on the balance sheet. The board has virtually no leverage to force Cemex to improve its offer price short of inviting a competitor to make a bid and putting the company "into play".
Rollin Bertrand PhD, DBA
TCL shareholder