Yesterday, the news headline was BWPT’s dilution by the Rajawali Group. As usual, share that performs badly goes into my radar. It occupied yesterday’s worst performance list and as of now, it is also hovering around the same place. Is this another case of maximum pessimism? Or is the fear of investors justified? I did a very rough (emphasis: ROUGH) calculation on what the share value is as of now, with few big assumption.

 
Before
Cash In, B4 Acq
After
Share Price543n.a.190
Market Cap2432n.a.5988
Equity2277133824990
EV6475n.a.10031
Liab404340434043
Asset6300174259033
Total Share4,471,182,99931,492,860,999
Rangen.aRp.500 - Rp.1,300Rp.190 - Rp.490

Before I explain, here are the few assumption:

1. P/B stays at 1.2. At p/b 1.2, the safety price is at Rp.190, if one has to use Astra Agro as the benchmark (3.1x), then the price would be at Rp.490. At this price, investors are expecting to the new BWPT to perform similarly with AALI, which is the most profitable, if not one of the most profitable, palm oil company in Indonesia. Of course, one should take BWPT’s young plantation into the account.

2. EV is roughly calculated as Market Cap + Liabilities. This is not a correct way to calculate EV. I repeat, it is a WRONG formula. I use that formula for the same of simplicity.

3. The acquired company is acquired using all cash (at 4.3x book value) and does not has new debt introduced into the company.

Okay, now the explanation of my thoughts. I want to reemphasize that this is an analysis done in less than an hour, so please bear in mind. I would very much welcome additional input from the reader. First of all, we have to think if we are the owners before BWPT’s corporate action. This means that we owned a company, at Rp.540, that has book value of 2,277 with 4,043 liabilities. This company that we owned 100% has enterprise value of 6,475. Our total share is around 4.4 billion.

Enter the corporate action. In return of 11tio of money, the company will issue around 27 billion of new share. This seems to be okay, since the new company will have 11 trillion of cash. This will bring the value of current company to be in the range of Rp.500 – Rp.1,300 (P/B range of 1.2x – 3.1x). However, since the money will be used to acquire Rajawali’s company at 4.3x book value, then the money will be out. It is just a matter of moving the left pocket to the right pocket (with a potential small profit and fees to the bankers, auditors, and lawyers). If this is the case, assuming some of the numbers are fixed in the new company, the equity of the new company will be increased to 4,990, and this is at the expense of the dilution. How much of the dilution? We used to own 100% of the company. In the new structure, our ownership is drained down to 14%. At this arrangement, the range of current value of the company is only Rp. 190 – Rp. 490.

Initially, this might be a good buy at around Rp.500, if the acquisition is not that high. However, since the management will destroy shareholder value at extremely high level, at Rp.500, we are betting that the best will happen. That might not be necessarily the case. Some people who understand their business would be willing to take the bet. Not us. We will take a look again once the level goes to around Rp.200.

Disclaimer: This is a less than 60 minutes analysis done on a piece of tissue paper (as the result, there will be many leap in logic). All foolishness done in response to this write up, and all profitable gains done as the result of mocking and ignoring this write up are solely the responsibility of each reader, not us. Put your thinking hat on!