Diesel and Motor Engineering (Dimo) said this week that it plans to fund its recent repurchase of Dimo shares from the Hayleys Group though a series of options including sale of company property, selling off stocks in other companies and floating a rights issue.

The company borrowed Rs. 544 million to pay Hayleys for 3.397 million shares or 28 percent of Dimo last week. The repurchase deal raised many questions in the Colombo stockmarket as to the source of funding the purchase and brokers were also quoted for many days as saying the deal had reduced the Dimo share value for most shareholders.

"There are other ways to fund the buy back. We are looking at some options such as selling some of our non-performing assets, selling some shares we have in other companies and also going for a rights issue," A Ranjith Pandithage, Chairman and CEO Dimo told The Sunday Times FT on Thursday while responding to questions on the transaction.

He said there are same non-performing assets such as land the company owns in prime locations which Dimo may dispose of. "Currently we have some of our logistic areas in Weliveriya. So the present area we use in Colombo 14 (Grandpass - which is about 80 perches) can be disposed of," he said. Mr Pandithage said the company may go for a rights issue soon.

Some stock market analysts said that Dimo inherited a highly geared balance sheet with a net debt to equity of 166 percent in 2007/08 mainly due to the OD facilities obtained for vehicle imports. "In 2007/08 the company had a total debt of Rs.2.8 million (of which 73 percent is OD) as opposed to a cash and cash equivalent of just Rs.51.2 million. Therefore due to lack of cash in hand, the buy back will have been totally financed by borrowings.

This will result in the net debt to equity further worsening which will be detrimental to the company with the high interest rate environment that prevails in the country," one analyst said. But Mr. Pandithage rejected this argument, "There will not be an impact on the interest on the borrowing which we have taken to fund the buy back."

When asked what led Dimo to repurchase these shares, Mr. Pandithage said, "Hayleys wanted to sell their Dimo shares, because the company was on a restructuring drive. The agreement was to first offer the shares to me. I wanted to buy it together with the children of the other founding members, the Algama's and Peiris'," he explained further.

Mr. Pandithage said that at the time of buying, the Dimo share was Rs.90. "We offered Rs.147, because in the Hayleys books, the value of the 3.8 million Dimo shares was at Rs.500 million. That is the reason we agreed at Rs.147 a share, because when you work it out a share comes to that amount," he explained.

He said Hayleys had then received other offers to sell the Dimo share at Rs160. "Hayleys asked whether we can better our offer to Rs.160 share. Then we wanted to complete the transaction at that price and finish it off," he added.

The Pandithage family's direct holding is at 39.39 percent. Mr. Pandithage said that at the recent annual general meeting of Dimo, a majority of the shareholders wanted the company to buy the shares back, in line with provisions of the new Company's Act where a company can repurchase its own shares.
"They said this will benefit all Dimo shareholders. That is why we decided to go ahead with it," he said.

He noted that the wealth of Dimo is not so much the fixed assets, but the agencies it has managed to secure during the years. "We are the oldest Mercedes agent in Asia- its 69 years now. We have the world's top brands such as Tata, Siemens, Michellin, Ostram Lighting, etc. These are more relationships we have with the principles than business partnerships," he said, adding that if there was a change of hands of share ownership in Dimo, there was a serious threat of losing theagencies.

"To avoid the hostile buying at Hayleys which may have affected Dimo's shareholding and the company losing the agencies, we decided to buy the shares. Also we have more than 1000 staff. We did not want to jeopardise their positions."
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