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Is S$2.50 a Fair Price for Goodpack?

After talks with a few interested parties, Goodpack (SGX: G05) has finally obtained an official bid for itself.

KKR (NYSE: KKR), one of the world’s largest private equity firms, has offered S$2.50 per share to take full control of Goodpack, the largest intermediate bulk container (IBC) provider in the world.

Although Goodpack’s chairman and main shareholder, Mr. David Lam, has already indicated his willingness to sell off his 32% stake in the company, is the deal a fair one for all shareholders?

What is the valuation?

Between 2008 and 2013, Godopack has grown its earnings by almost 12% per year from US$30.1 million to US$52 million. That rate of growth hasn’t slowed by much, judging from its 9% year-on-year growth in profits for the first 9 months for its financial year ended June 2014.

In addition, the company has been very effective at generating returns for shareholders as judged from its return on equity; that figure has been higher than 15% over the past five years.

Meanwhile, at S$2.50 per share, the deal values Goodpack at about S$1.4 billion in total. This gives the company a price to earnings ratio of 20 times based on its profits over the last 12 months.

What is good for shareholders might not be bad for KKR

Pulling all the figures together – Goodpack’s historical growth rates; its impressive returns on equity; and the acquisition price – it would seem that Goodpack’s current shareholders are getting a good deal.

However, this does not mean that KKR’s getting the shorter-end of the straw. The private equity firm is well-known for its deal-making skills throughout its history. It also has a strong network and management team who might be able to significantly increase the profitability of Goodpack in the future.

Furthermore, the private equity firm might also consider a leveraged-buyout (LBO) of Goodpack. In a LBO, the buyer would use borrowings to finance most of the purchase price and then heap the debt onto the acquired party. The buyer would then earn from whatever profits the acquired party can earn after paying down the interest expenses for those borrowings. Given the low interest rate environment currently, it’s likely that Goodpack would not have too many difficulties in servicing future interest expenses, if any.

Foolish Summary

From the looks of things, the deal seems fair for both shareholders of Goodpack and for KKR. Assuming the deal goes through, it’ll be a shame to see – as investors in Singapore’s stock market – one less option available from now on.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.