BRC Asia is Singapore's leading pre-fabricated steel mesh (above) supplier.

Big is beautiful for HG Metal, one of South East Asia’s largest steel traders, which is offering to acquire 70.28% of its SGX-listed customer, BRC Asia.

Sales and purchase agreements were signed on 12 Aug for the acquisition via HG Metal's 51%-owned subsidiary.

The takeover will cost HG Metal at least S$48.1 million in cash.

”Size is a key success factor for any steel player,” said HG Metal CEO, Wee Piew, during yesterday’s briefing announcing the takeover of Acertec’s 70.28% stake.

Mr Wee revealed that the company is open to other mergers and acquisitions to expand.

HG Metal generated sales of S$534 million for the first nine months of its financial year ending Sep 2008, the bulk of which came from steel trading.

Last year, 10% of its revenues came from manufacturing customized flat steel bars and mild steel lip channels for roofing support in commercial and industrial buildings.

The steel trader looks set to ride on Singapore's construction boom.

After last year's bumper record of S$24.5 billion in construction contracts awarded, another S$54.4 billion worth were committed for delivery over 2008-2010, according to UBS estimates in Jan 2008.

HG Metal's manufacturing segment will be enhanced with the latest acquisition, as BRC Asia dominates the steel wire mesh market for Singapore’s construction sector with a 40% share.

Other synergies include:
+ Cross-selling to each other’s customers.  Other than Singapore, HG Metal is also present in Malaysia and Indonesia while BRC Asia is also present in Hong Kong and Shanghai.
+ Better terms from steel and logistic suppliers as a result of enlarged steel volumes transacted
Streamlining of warehousing operations

The takeover is at 11 cents per share and is broken into two tranches:

Tranche One: 349.5 million shares (56.14%), acquisition to be completed by 22 Sep 2008.
Tranche Two: Another 88.05 million shares (14.14%) within a year after Tranche One is completed.

Upon completion of Tranche One’s acquisition, HG Metal’s takeover vehicle will also make a mandatory unconditional cash offer at 11 cents per share for the public float, which amounted to 29.5% in BRC Asia as at 24 March 2008.

The offer price of 11 cents represents a 10.6% discount on the volume weighted average price of BRC Asia shares in the past 6 months and a 12x price multiple on BRC Asia’s FY07 net earnings.

Suppliers of Construction Steel Products Stock Price Market Cap Sales Historic PE Gross Margin
BRC ASIA LTD $0.110 S$68.5m S$130.3m 12.2 10.4%
LEE METAL GROUP $0.180 S$71.3m S$1.5bn 5.1 3.5%
NAM LEE PRESSED METAL $0.140 S$63.5m S$143.3m 6.6 14.7%

Source: Bloomberg / NextInsight, 12 Aug 2008

Trading in both stocks were halted on 12 Aug at 2pm and resumes this morning.

A good run up during the first half of 2007, but BRC Asia is now being taken over at close to its 52-week low. Bloomberg chart.

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