Dear Editors,
Regarding the article yesterday on the proposed LBO of Boto, it will not succeed on its current terms.
Actually the leisure furniture business is not "pretty negligible" - they sold about HK $182m (based on H1 + orders in hand at 30-Sep-01) for the year just ended 31-Mar-02. That is more than double the previous year's sales of HK$81.7m.
The HK$182m compares with festive products (xmas trees and decorations) of HK$828m in the year to 31-Mar-01 and maybe HK$950m in the year to 31-Mar-02. So leisure furniture is already running at about 20% of sales and growing rapidly. That's the growth engine, and there is no way will minority shareholders part with that for 5.6x Mar-02 earnings!
The two businesses accounted for 100% of group sales in the year to 31-Mar-01. This is a backdoor privatisation attempt at a massive discount.
HSBC, which is a cautious lender, is willing to advance HK$804m (including working capital facility), or 80% of the current purchase price, not because they like 400% debt:equity gearing on their borrowers, but because they know the real value is a lot more than the purchase price. They would typically only lend 40-50% against fair value, implying a valuation range of HK$1,600-2,000m. The mid-point of that is $1,800m, or around 10x Mar-02 earnings. I think a privatisation offer for all the outstanding shares at that price (equivalent to HK$0.52 per share) would stand a reasonable chance of success.
