Mentor Media @ 61.5 cts ( Contract manufacturing / Singapore ) 4 comments

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Main issues

1.Limited upside given imminent takeover at 66 cents

Mentor Media operates integrated supply chain management and order fulfilment services mainly to technology MNCs operating in China; as it assembles customised country kits for manufactured goods such as PCs and consumer electronics, it covers the last mile in the supply chain and is closely integrated to the MNC customers' outsourcing operations, in particular HP with whom its management have long-standing ties. It is a play on outsourcing in China, a theme as valid today as anytime in the past.

The company has been achieving solid growth in topline and bottomline over the past three years, and from what I can see of its operations it is asset light and generates excellent cash flow. It is among the top order fulfilment players in China for PC desktops. In fact it was recently chosen by Forbes as one of the 200 most promising companies in Asia with topline under a billion dollars, one of only 11 companies on the SGX to receive the honour. So why am I advising against a buy here?

That's because an investment company has offered to buy over Mentor at 66 cents in September, and the management of Mentor Media, all key shareholders, have irrevocably agreed to sell their stake at this price. The stock has been consolidating at 61-63 cents since then, and the reward for holding is just not worth the opportunity costs incurred in the estimated 2-3 months to eventual fulfilment of the purchase.

There are hostile takeovers and there are amicable takeovers. UIC and UOL previously were bid up to high prices because the incumbent owner was not ready to let go of his strategic stakes in both companies. Mentor certainly does not belong to this category; indeed the deal appears to be all but tied up given that Wong Yat Foo, the key shareholder, has agreed to sell his stake.

Consider the possible scenarios. The due diligence process is completed probably in 1Q06, Mentor shareholders are paid 66 cents in cash; so whoever buys now gets a profit of 4.5 cents per share, a gain of <7% for 3 months of waiting. Not bad compared to bank interests, but could be put to better use in other stocks. Meanwhile in the meantime there is 99% probability that the price won't rise above 66 cents given the irrevocable undertakings by Mentor management. A second scenario: that the deal doesn't go through for some reason. The share price is more likely to trend downwards than upwards; shareholders would suspect that there is something wrong with Mentor that was revealed by the due diligence process; remember that Mentor had already been the subject of a proposed takeover in 2002 by Banta which didn't materialise. The third scenario would be what shareholders would hope for: that somebody else enters the fray and bids a higher price. There are no indications at the moment that this could happen; hope is not a strategy.

Given the scenario assessment described above, it just does not seem worthwhile to hold the stock. I am peeved myself because I bought the stock earlier hoping for a two-bagger but instead because of this takeover deal I have had to settle for 20-30% gains.