A letter from David Webb

David Webb, the shareholder activist responds to yesterday''s article on Boto''s proposed LBO by Carlyle Group.

Dear Editors,

Regarding the article yesterday on the proposed LBO of Boto, it will not succeed on its current terms.

Actually the leisure furniture business is not "pretty negligible" - they sold about HK $182m (based on H1 + orders in hand at 30-Sep-01) for the year just ended 31-Mar-02. That is more than double the previous year's sales of HK$81.7m.

The HK$182m compares with festive products (xmas trees and decorations) of HK$828m in the year to 31-Mar-01 and maybe HK$950m in the year to 31-Mar-02. So leisure furniture is already running at about 20% of sales and growing rapidly. That's the growth engine, and there is no way will minority shareholders part with that for 5.6x Mar-02 earnings!

The two businesses accounted for 100% of group sales in the year to 31-Mar-01. This is a backdoor privatisation attempt at a massive discount.

HSBC, which is a cautious lender, is willing to advance HK$804m (including working capital facility), or 80% of the current purchase price, not because they like 400% debt:equity gearing on their borrowers, but because they know the real value is a lot more than the purchase price. They would typically only lend 40-50% against fair value, implying a valuation range of HK$1,600-2,000m. The mid-point of that is $1,800m, or around 10x Mar-02 earnings. I think a privatisation offer for all the outstanding shares at that price (equivalent to HK$0.52 per share) would stand a reasonable chance of success.

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