ON April 1, minority shareholders of Halex Holdings Bhd will decide at an extraordinary general meeting (EGM) whether to approve the acquisition of Hextar Chemicals Ltd (HCL) for RM596.79 million.

Halex, a manufacturer and distributor of agrochemical products, has been in the red for four consecutive years, registering total losses of more than RM45 million from 2015 to 2018.

Over the same period, HCL — a bigger rival — made a profit of RM142 million, or an average of RM35.5 million a year.

The deal values HCL at 13.75 times over its net profit of RM43.4 million in the financial year ended Dec 31, 2017 (FY2017).

If Halex gets the green light to acquire the entire equity interest in HCL, it would return to the black right away.

But here is the catch — the acquisition of HCL would be heavily dilutive for existing shareholders of Halex as it is a 3% cash plus 97% shares deal.

Nevertheless, Halex executive director Datuk Eddie Ong Choo Meng believes the acquisition of HCL is a good opportunity to revive the company.

“Halex has been loss-making in recent years. It needs a new business to come in. We have a lot of ideas on how to grow the two companies together. We will save a lot on capital expenditure, building and people, which will be very impactful for the group,” the 41-year-old tells The Edge in an interview.

For perspective, Halex’s acquisition of HCL is essentially a business injection by Hextar Holdings Sdn Bhd — the flagship company of Choo Meng and his father, Datuk Ong Soon Ho.

Hextar, through HCL, is the country’s largest pesticide producer. It also manufactures chemical fertilisers and industrial chemical products.

Set up in 1985, Hextar has grown from a family-owned agrochemical marketing company to an international player with more than 600 patents and products registered here and abroad.

To recap, Choo Meng, who is also Hextar CEO, was appointed to the board of Halex in May 2017, two months after the father and son surfaced as substantial shareholders in the latter.

Subsequently, in December 2017, it was announced that Hextar planned to hive off HCL to Halex for RM596.79 million, of which only RM17.9 million will be in cash, while the remaining RM578.89 million will be satisfied by the issuance of 714.68 million Halex shares at 81 sen apiece.

Choo Meng and his father are the controlling shareholders of Halex with a 52% shareholding, held through Hextar. Their interest in Halex will be bumped up to 94% after the acquisition of HCL is completed.

To comply with public shareholding spread, says Choo Meng, Hextar will have to place out about 18% to 25% interest in Halex.

“We have identified a placement agent, but we have not found any investor yet. We will go for a roadshow only if we can get the mandate from shareholders to go ahead with the acquisition,” he explains.

“We (me and my father) are not allowed to vote at Monday’s EGM. We leave it to the minorities to decide, but we need 50% approval from the attendees,” he adds.

Eyeing RM1 billion market cap

Going forward, Halex aims to grow its market capitalisation to RM1 billion, from RM92.2 million currently, within three to four years by growing organically as well as via mergers and acquisitions (M&A).

“We foresee that in the next four to five years, HCL’s profits will become much bigger than they are now. Our next goal is to become a billion-ringgit company. We will not slow down until we achieve that,” he says confidently.

HCL is the largest agrochemical firm in Malaysia, commanding a market share of 25%. Halex is a smaller player with a market share of about 4% to 5%. Together, the two companies will have a market share of 30%.

HCL’s plant in Pulau Indah currently has a production capacity of 25 million litres of agrochemicals a year, while Halex’s plant in Johor produces close to four million litres.

“The ideal situation is to combine both operations. Then, we can save a lot of resources, whether it is people, manufacturing processes or inventory management. We definitely see synergy between HCL and Halex,” says Choo Meng.

Considering that Hextar still has other chemical-related businesses, he does not discount the possibility of injecting more businesses into Halex in the future.

He points out, however, that from Halex’s perspective, the company will not be relying on just injections from Hextar. Instead, Halex will also be looking at other M&A opportunities.

“Let’s see how it goes. There is no point for Hextar to keep injecting businesses into Halex. We need to look at the bigger picture. There are still many companies out there to be acquired. We believe M&A is the way for us to grow.

“We are planning for a few M&As in the coming two years. M&A has always been Hextar’s forte. We know how to do it. We are being trained on how to grow the company by undertaking M&As. Halex will be riding on that as we aim to be the largest player in Southeast Asia,” he sums up.