Dhammika, RCL in Rs. 20 b takeover bid of Hayleys

Acting in concert, trigger SEC’s Takeovers and Mergers Code by crossing 30% stake in manufactured export rich diversified blue chip and one of few oldest Lankan multinationals

It was untouched as well as impregnable for years, but finally two men – who are often underestimated – made it against the odds.

The duo, Dhammika and Nimal Perera – unrelated but best of buddies – yesterday triggered the SEC Takeovers and Mergers Code on manufactured export rich diversified blue chip Hayleys PLC, which is one of Sri Lanka’s few multinationals, founded in 1878.

Royal Ceramics’ (RCL) purchase of 155,000 Hayleys shares yesterday at Rs. 380 each from Jetwing Group-owned Negombo Hotels triggered the code. On Wednesday RCL bought 225,000 shares at the same price preceded by Dhammika buying around 200,000 shares on Tuesday both from S.N. Palihena, former General Manager of Bank of Ceylon.

These deals collectively pushed the combined stake of Dhammika and RCL above the SEC threshold of 30%. Dhammika’s personal stake in Hayleys is estimated to be around 28% whilst that of RCL is over 2%. Dhammika, via his currently 100% owned Vallibel One Ltd., holds a 51% stake in RCL.

The issued shares of Hayleys is 75 million and the remaining 70% stake amounts to 52.5 million shares and at the offer price of Rs. 380 per share, the takeover bid is worth Rs. 20 billion, making it the biggest ever in the corporate history of Sri Lanka. The cost of acquiring the 21% stake amounting to 15.75 million shares to get 51% control is Rs. 6 billion. Market closed before the news of the takeover bid and Hayleys saw 225,972 shares traded between a high of Rs. 399 and a low of Rs. 380 before closing at Rs. 390, down by Rs. 4.

“We triggered the code because we believe in achieving 51% control which has been our policy from the inception in all our previous endeavours,” RCL Managing Director Nimal, who was instrumental in encouraging Dhammika to enter Hayleys, told Daily FT.  Dhammika is the Deputy Chairman of RCL and both serve on the Board of Hayleys with former functioning as the Deputy Chairman.

Triggering the SEC Code isn’t new to the Dhammika-Nimal duo. In fact they are masters in it. In the early and mid 2000s, the duo created a sensation by triggering the code on six companies starting from Connaissance (now Amaya Hotels and Resorts), Hotel Reefcomber, Fortress, Royal Ceramics, LB Finance and Vallibel Finance (then Rupee Finance).

These acquisitions are what made the rest of corporate Sri Lanka take notice of the duo, whose relationship has strengthened with the passage of time.

In mid June 2008, when Dhammika bought a symbolic yet strategic 7% stake in Hayleys held by Carson Cumberbatch Group at Rs. 125 per share, those who knew the duo well sensed the game plan. Thereafter he went up to 15%, after which Hayleys had to partly bite its own pride and invite Dhammika on to the Board followed by Nimal. Thereafter they kept on collecting available quantities of Hayleys, moving up to 23% in early 2010 and by October 2010, the collective stake was around 29%.

With a 30%+ stake along with around a 9% stake held by Hayleys subsidiaries, Dhammika has effective control, but it appears that they will be comfortable only with 51%.

The internal arrangement ESOP owns around a 9% stake in Hayleys as well. Hayleys’ former iconic Chairman D.S. Jayasundera’s Trust holds 11.6%.

Hayleys has been susceptible to takeover bids or ideas. A way to counter these threats was to float the ESOP. There were reports or rumours in the past of Carson Group being keen, but that it backed out due to resistance from within. Thereafter, fresh rumours surfaced during the active days of Lankan-born US Hedge Fund Manager Raj Rajaratnam, who held a substantial stake.

A senior business leader recalled that a former Hayleys Board Director, the late M.T.L. Fernando of Ernst & Young Sri Lanka fame, maintained that Hayleys was impregnable to outsiders. In that respect, the Dhammika and Nimal duo have made history.

Founded in 1878 as Chas P. Hayley & Company, Hayleys is described as one of the largest Sri Lankan multinationals. Its portfolio of globally competitive core businesses includes global markets and manufacturing, agriculture and agri business, transportation and infrastructure and consumer products and leisure. Hayleys also accounts for 2.45% of Sri Lanka’s export income.

Personally, for Dhammika, the Hayleys takeover bid comes amidst a much smaller exercise on Lanka Aluminium PLC. He triggered the SEC Code early this week when he increased the stake to 34% with the purchase of 8% at Rs. 41.50 per share. If minority shareholders accept the offer, the total cost for Dhammika will be Rs. 375 million.

The takeover bid of the number two in the industry, Lanka Aluminium, is following Hayleys acquiring a 95% stake in market leader Alumex for Rs. 2 billion late last year.

The Dhammika-Nimal duo remain dynamic. Recently they successfully raised Rs. 4.9 billion in what was the biggest private placement in Sri Lanka for Dhammika’s first holding company Vallibel One Ltd. The issuance of 196 million shares at Rs. 25 each drew Rs. 7.6 billion demand.

This private placement was a precursor to Vallibel One’s IPO at the same price in March. Vallibel One holds control of RCL, LB Finance and a 15% stake in Sampath Bank. In addition it has a leisure arm, Green Water Ltd., which is building a 382 room five star luxury resort in Negombo as well as planned investments in renewable energy projects.

Whilst third quarter results are pending, Hayleys in the first half posted a pre‐tax profit of Rs. 1.2 billion on a turnover of Rs. 24.8 billion.

Turnover grew by a solid 47% over the corresponding six months of last year, with significantly higher volumes in key sectors such as hand protection, purification and transportation and the consolidation of contributions from increased shareholdings in sectors such as textiles, leisure and plantations.

First half profit before tax reflected an improvement of 11%, despite the latter including a capital gain of Rs. 226 million. Tax expenses increased in the six months ending 30 September 2010, largely due to this reason. Consequently, profit after tax for the period at Rs. 830 million was marginally above that of last year.