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PJ Asset Management Urges Shareholders of TECO Electric and Machinery Co., Ltd. (1504 TT) to Show Full Support of PJAM's Proposal at the AGM on May 11, 2020

2020-04-21 15:23 761

TAIPEI, April 21, 2020 /PRNewswire/ -- PJ Asset Management Company ("PJAM") today issued a letter cautioning all shareholders of TECO Electric and Machinery Co., Ltd. ("TECO" or "Company", 1504.TT) on the Company's proposed amendment to its Articles of Incorporation ("AOI") and urging their full support of PJAM's proposal of a 10% capital reduction that would return cash to shareholders. This proposed resolution, listed as "Proposal 4 in Discussion Items" at TECO's upcoming AGM, aims to improve the capital structure and improve shareholders' returns. PJAM and its subsidiary, Jaryuan Investment Co. Ltd., together make up TECO's single largest shareholder, holding more than 21% of its common stock.

The original letter in Chinese can be found at:
http://www.pjam.com.tw/index.php?route=newsblog/article&article_id=44&lang=zh-TW

The corresponding English version is provided below:

To all TECO shareholders,

PJAM issued a letter on April 7, 2020, urging fellow investors to vote "no" on TECO's proposal to issue common shares/preferred shares via private placement. In a last-minute move, TECO then withdrew two proposals on April 10, 2020 by amending the relevant public notices on the Market Observation Post System (MOPS) and replacing the prior AGM notice delivered to shareholders by mail. For PJAM and other market investors, the change was both abrupt and unusual. We were satisfied to see TECO's response in its sensible withdrawal of the counteraction, only to be caught off guard by the insertion of a new clause in its proposed AOI amendment.

PJAM continues to remind all investors that TECO currently has a strong capital position with abundant cash, so any further capital-raising at the current depressed valuation not only does not address the lack of growth investments, but also demonstrates a poor understanding of capital allocation. Furthermore, there is no significant future investment foreseeable in TECO's public announcements.

If TECO wants to raise cash to support its various business development goals, it should do so by tapping bank credit lines, right-sizing its net working capital, and selling non-performing investments – not by undergoing equity dilution at depressed valuation. Judging from TECO's published financial information, its announced TWD5 billion unsecured corporate bond issuance plan and its overall strong credit rating, the Company has no difficulty in raising extra cash at a much cheaper level and avoiding any impact to its depressed ROE.

PJAM has carefully read through the eight pages covering the rights, obligations and other important issuance terms of the Class A, B and C preferred shares. We maintain reasonable suspicion that the proposed amendment will turn into a poison pill. Our concerns are based on the following points:

1. Circumventing the capital raising proposal

By adding the provisions in its current AOI for the issuance of Class A, B and C preferred shares within the existing authorized capital of TWD30 billion, TECO will grant its Board a blank check to inflate the Company's abundant capital in the future to a maximum of TWD10 billion share capital(equivalent to TWD26 billion, or around USD866 million, in cash being raised at @26.00 per share) through either private placement or public offering, and with or without the approval of all shareholders. In fact, TECO has not given up its goal of raising privately placed capital; rather, it intends to circumvent the normal approach by way of an AOI amendment to evade public scrutiny. Embedding the shares issuance into the AOI lowers the matter's approval threshold at the AGM, whereas the approval of private placement is subject to the stricter super majority rule.

2. Unprecedented favorable terms for preferred shares

TECO's superior twA+ long-term credit rating allows the Company to obtain cheap funding at around 1% for five to seven years. Thus, paying no higher than 5% to holders of 3-year preferred shares is a questionable decision by TECO's Board. The proposed issuance terms of Class A, B and C preferred shares is also unprecedented in that they grant these shareholders voting rights equal to those of common stock shareholders. In general market practices, these inferior terms are seen with companies in distress. If we are not careful, once approved, this proposal would wholly disregard TECO's prestigious creditworthiness and undermine all shareholders' interests. The following table shows the key features of the proposed issuance terms of Class A, B and C preferred shares by TECO's AGM handbook.

Preferred Shares

Class A

Class B

Class C

Dividend yield

V

(=<5%)

V

(=<5%)

V

(5%?)*

Dividend accumulated

X

X

V  

Voting right

V

V

V

Elected as a Board director

X(?)*

V

Converted into common shares**

X

V

Early Redemption after 5th year anniversary

V

V

V

*TECO delivered inconsistent messages between the English and Chinese versions of its AGM handbook, which might mislead interpretations among the investors.

**The P/S may not be converted within three years after the date of issuance.

3. Serious financial impact to common shareholders

The issuance of preferred shares will dilute TECO's capital base and depress its ROE. The dividend distribution priority for shareholders of preferred shares is placed ahead of shareholders of ordinary shares, which will undoubtedly diminish the future dividend payout to common shareholders.

Simulated financial impacts to TECO common shareholders
Simulated financial impacts to TECO common shareholders

Therefore, we strongly urge all shareholders to vote as follows in these key items:

Vote

Proposed by

Discussion Item

NO

TECO

Amendment to "Articles of Incorporation" (Discussion Items, Proposal 3)  

YES

PJAM

Proposal on capital reduction by returning cash to shareholders (Discussion Items, Proposal 4)

On the whole, TECO's recent actions, taken late into the night, indicate its Board's dysfunctional ways and reckless decision-making process. More disappointing is the Company's inability to offer any meaningful explanation for its abrupt change in actions, while it has side-stepped key concerns by further lowering capital efficiency in ROE terms and possibly depleting the dividend payout to common shareholders.

To the extent that you may understand TECO's implicit plans, the following graphs demonstrate how a more efficient TECO would look like after PJAM's 10% capital reduction proposal.

A more efficient capital of TECO
A more efficient capital of TECO

At PJAM, we cherish all shareholders' rights and benefits and urge all fellow investors to duly exercise your empowered right. We believe that the above-mentioned voting decision at the AGM on May 11, 2020, will be crucial for your best judgement and vital to protecting all shareholders' benefits.

Best Regards,

PJ Asset Management Co., Ltd.

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Source: PJ Asset Management
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