Why Innovalues should accept Northstar's offer

The present offer is $1.01 per share.

Innovalues recently announced a proposed acquisition by a PE fund, Northstar Equity Partners IV, by way of a scheme of arrangement, which requires at least 75% shareholder approval, of which key shareholder undertakings already amount to 38.73%.

DBS Group Research believes that while the present offer of $1.01 per share is not stellar, it leaves room for competing bids to be made.

"While the offer could have been more attractive, we believe it has come at an opportune time, allowing investors to capitalise on the Group’s recovery from 2Q16, while paring exposure to potential industry headwinds as global economic activity remains subdued," it said in a report.

According to the research house, despite the lack of a clear M&A premium, the current offer could attract higher competing bids for Innovalues.

"The offeror has the right to launch a voluntary conditional cash offer (conditioned upon a >50% acceptance level), which could provide upside to the base offer of S$1.01," it explained.

Innovalues has two options - to elect cash or combination of cash and securities. For each Innovalues share, existing shareholders will be entitled to receive either: Option 1: S$1.01 in cash, or Option 2: S$0.61 in cash and one share in the Holding Company, Precision Solutions Group at an issue price of S$0.40.

Of the two options made available to existing shareholders, DBS prefers Option 1 since it is all cash as compared to Option 2, whose upside remains unclear at this point.