Get fair deal for shareholders in takeovers

[greengiraffe]

Get fair deal for shareholders in takeovers

What the independent directors can do is ask a lot of tough questions
Published on Apr 21, 2014 1:04 AM
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The Minhang Plaza shopping centre in Shanghai, developed by CapitaMalls Asia, a unit of CapitaLand. The privatisation wave includes CapitaLand and its $3.06 billion effort to buy out the rest of CapitaMalls Asia. -- PHOTO: BLOOMBERG

By Goh Eng Yeow Senior Correspondent

THE pace of trading has quickened again in recent days as a fresh wave of takeovers sweeps across the market.

One observation about this takeover fever is that companies are not overpaying in order to acquire other businesses or realign their capital structure by taking private units they already control.

But the gripe is that the premiums they offer may not be attractive enough to entice investors, hence the attempts being made to frustrate these privatisation drives.

Take the move by United Industrial Corporation (UIC) to buy up the rest of Singapore Land, in which it holds an 80.4 per cent stake. UIC had offered an 11.24 per cent premium to SingLand's undisturbed price.

However, that still priced the offer at a hefty 33.1 per cent discount to SingLand's book value. This got the Singapore Exchange to ask ANZ, the offer's independent financial adviser, on how it arrived at its assessment that the offer was fair and reasonable.

But it was the effort by SingLand's second biggest shareholder, Silchester International Investors, to foil UIC's privatisation efforts that was really eye-catching.

SGX listing rules require a listed firm to keep at least 10 per cent of its shares in public hands. Since Silchester had owned 8.16 per cent of SingLand, this meant the developer's free float was only 11.48 per cent, once UIC's 80.4 per cent stake is factored in.

Silchester moved to pare its stake to below 5 per cent, which increased the public float. "This is likely to significantly impair the efforts of UIC to delist the company. Taking these steps helps to safeguard part of our client's interests," it said, before going ahead with the sell-down.

As of last Thursday, UIC had secured acceptances which increased its stake in SingLand to 87.3 per cent. The offer is extended till today, with its price kept unchanged.

The privatisation wave also includes CapitaLand and its $3.06 billion effort to buy out the rest of CapitaMalls Asia (CMA), in which it already owns about 65.2 per cent.

CapitaLand's offer price of $2.22 apiece gives an investor an attractive 23 per cent premium to CMA's last-traded share price of $1.805 before the takeover was announced.

But one question being raised is whether the $2.22-a-share offer would be attractive enough for investors who have held CMA shares since its 2009 IPO, given the risks they had taken, as they would only be rewarded with a 4.72 per cent premium over the IPO purchase price of $2.12.

This is considering the great strides made by CMA in building up its business. When it was listed in November 2009, it had 86 retail properties - 59 completed malls and another 27 under development - in Singapore, China, Japan, Malaysia and India.

But as at the end of last year, that number had risen to 105 malls - 85 in operation, four to be opened this year and another 16 under development.

CMA's net asset value had also grown 37.7 per cent to $7.3 billion during the period.

So, given the considerable debate triggered over the fairness of the recent takeover offers, the onus falls on the independent directors of the takeover target to come up with recommendations to shareholders so that they can make an informed decision as to whether to accept the offer.

As it is, the takeover code requires the target company's directors to appoint an independent financial adviser (IFA) to assess the merits of the offer. But all will agree that the starting point for them should be to act in the best interests of the company and how to get the maximum value for shareholders in the event of an outright sale.

In the case of Fraser & Neave, its previous board went beyond just merely assessing the IFA's advice. It created a competitive bid situation using a $50 million break fee as a device to attract a competing bidder, a move that ultimately led to Thai billionaire Charoen Sirivadhanabhakdi sweetening his offer in order to win control of the company.

Some will argue that creating a similar competitive bid situation will be tough as many of the recent takeover targets are already more than 51 per cent controlled by a single shareholder. In such a situation, what the independent directors can do is ask a lot of tough questions. In extreme cases, they should even make it clear to the bidder that they would not be prepared to make any recommendation until the best possible deal is put on the table.

As one corporate lawyer observed, once a company is put in play because of a takeover, the duties of the board should change from one of managing the business to maximising its value at a sale for shareholders' benefit.

That, in a nutshell, is how a takeover should be handled - to ensure shareholders get a fair and reasonable price for parting with their stock.

engyeow@sph.com.sg

Background story

One observation about this takeover fever is that companies are not overpaying in order to acquire other businesses or realign their capital structure by taking private units they already control.

But the gripe is that the premiums they offer may not be attractive enough to entice investors, hence the attempts being made to frustrate these privatisation drives.

[opmi]

Sing Land only has 1 Independent Director, with regards to the recent UIC Offer.

SIC should set a rule that prevent IDA/ID to make statements like "Since there is no other offer on the table,
we recommend shareholders take up the current Offer". This is like a boy proposing to a girl "You must marry me coz no one
is proposing to you right now". 痴線.

[greengiraffe]

HOCK LOCK SIEW
Privatisation unhappiness: market is to blame

BYR SIVANITHY
sivan@sph.com.sg @RSivanithyBT

TAKEOVER/privatisation fever has gripped the local market in recent days as a flurry of these exercises have been announced. UIC kicked things off with its offer for Singapore Land, CapitaLand then grabbed the headlines with its plan to buy out all of CapitaMalls Asia (CMA), and a private consortium headed by Hotel Properties' boss Ong Beng Seng tabled a takeover of HPL that could eventually lead to HPL being delisted.
This, in turn, has sparked off a search for the next big privatisation play and driven the local market higher, as if this was something to be celebrated and trumpeted.
Truth be told, it isn't.
On the contrary, it is a damning indictment of a market aspiring to be a major gateway for global finance that good quality companies are being persistently mispriced by a supposedly efficient market. It isn't really efficient by any stretch, but let's pretend for argument's sake that it is. But once the delistings are done and dusted, a void will appear that will take years to fill.
The main victims of the market's mispricing are minority shareholders. In almost all cases - those past and present - there is unhappiness at "low" offer prices. In the case of the present crop of takeovers which are primarily property plays for which asset/book values are generally used as valuation benchmarks, one complaint is that the discount to asset values is simply too large to be considered fair. Another related complaint is that if there is a multiple of book value offered - as is the case with CMA (more on this later) - it isn't large enough.
While sympathies must lie with shareholders whose entry prices are higher than the offer price, it is a fact of commercial life that some will win and some will lose. Those who bought in the most recent months prior to offers being made would be the biggest winners; those who bought years earlier when the market price was higher could feel aggrieved.
Offerors, however, are not in the game of making everyone happy, and will always try for the lowest price they can secure. This can often mean not offering full value. Instead, their game plan is to put forth a price that is just sufficiently higher than the prevailing market to hopefully entice majority acceptance, but is low enough to allow for a margin to be made after full ownership is achieved.
In other words, it is a careful balancing act that involves straddling the market on the one hand, and other valuation benchmarks on the other.
In the case of CapitaLand/CMA, for example, the $2.22 that CapitaLand is offering is the highest in about 15 months, even though it is only 1.2x CMA's $1.87 book value per share. The latter, it has been argued, is too low since, when CMA listed some three-and-a-half years ago, it was priced at 1.55x book value.
This is true, but it is equally correct to say that CMA has languished for many more days at below $2.22 since it was listed than above it, which suggests that shareholders have had to put up with years of undervaluation. In fact, the stock has traded above $2.22 only once in the last three years.
Also, the $2.22 is a premium of 27 per cent over the prevailing market, which is much better than the 15.6 per cent offered to HPL shareholders, the 17 per cent offered for Global Premium Hotels and the 16.9 per cent for SingLand.
Seen in this context, it means the CMA offer is decent given existing circumstances. Not earth-shatteringly generous, mind you, but decent.
Whether shareholders accept remains to be seen, but the point is that CMA and all the others before it illustrate the harsh reality that sometimes market prices will not necessarily reflect economic or perceived realities.
Minority shareholders might think that an efficient market should recognise value when it sees it but this is not always the case. If you look hard enough, it's even possible to find companies trading below their cash values, never mind asset values.
This has been a perennial problem with all markets, but possibly one that has been accentuated over the past year in Singapore with international investors shunning emerging markets in the wake of the US Federal Reserve's tapering of its monetary stimulus.
Ultimately, shareholders of offeree companies have to ask themselves if they should wait for the market to "correctly" price their shares - in which case it could take years because of perennial market failure - or take what's on the table now.

[opmi]

Should remove the free float requirements for counters with more than $100m mkt cap.
No implied threat of suspension in circular.

Disallow the use of a new takeover vehicle for compulsory acq. Which is
an obvious loophole that is against the spirit of CA 215.

[greengiraffe]

CAI JIN
Privatisations: Back to the future

Takeover bids revive debate sparked by similar wave over a decade ago
Published on Apr 28, 2014 1:02 AM



By Goh Eng Yeow Senior Correspondent

PRIVATISATION fever has gripped the market again amid a spate of offers to buy out companies such as Singapore Land, CapitaMalls Asia and Hotel Properties.

The offers are mostly being made on property plays just when their share prices are languishing at sharp discounts to book values.

This, coupled with rock-bottom borrowing costs, makes it attractive for majority shareholders to try to take the firms private.

For older traders, however, concerns emerging over this bout of takeover fever bear an uncanny resemblance to a huge debate triggered by a similar wave of takeovers after the bursting of the dotcom bubble over a decade ago.

For instance, complaints made by minority shareholders over low takeover valuation prices back then have echoes of the indignation expressed by aggrieved investors in the recent takeover bids.

Take this letter from reader Terry Shiau to the Forum pages of this newspaper in 2001: He observed that there should be rules protecting investors who might be adversely affected by companies which listed their subsidiaries when the stock market was strong, and valuations were high, only to privatise them when valuations were low.

In the same vein, retail investor Vincent Khoo recently wrote: "Retail investors need to have confidence in the market and a level playing field. But recent takeovers and privatisation offers treat retail investors and minority shareholders as easy prey."

He cited the instance of RDL seeking to privatise smallish property developer LCD Global Investments at a 47 per cent discount to book value where minority shareholders might have cause to feel aggrieved.

One suspicion is that majority shareholders taking their companies private may have plans which they do not disclose to the offerees. They also possess much more information than a retail investor.

Any advice offered by the independent financial adviser is made with a similar information deficit: They are just hired to give a fairness opinion and do not have full access to future plans.

Still, there may be a few useful lessons which minority shareholders can draw from the 2001 takeover outbreak to help them to decide whether to part with their shares, or to keep holding them in hopes of a market turnaround.

One salient example is Keppel Corp's 2001 privatisation of two of its units - Keppel Fels Energy & Infrastructure (KepFels) and Keppel Hitachi Zosen (KHZ) - using part of the $1.85 billion proceeds from selling its 36.7 per cent stake in Keppel Capital to OCBC Bank.

Keppel paid only $1.55 apiece for KepFels - the unit which later turned the group into a world-beater in rig-building - which priced the takeover target at a 21 per cent premium over its last done price before the takeover.

Now fast-forward in time, and some would say that CapitaLand might be "doing a Keppel" in its proposed $3.06 billion buyout of mall operator CapitaMalls Asia (CMA).

Like cash-rich Keppel before it, CapitaLand's coffers swelled by $1.5 billion after selling its stake in Australia-listed Australand and it is offering CMA shareholders a similar-sized 23 per cent premium to CMA's last-traded share price before the buyout offer.

The KepFels purchase turned out to be one of Keppel's shrewdest moves, as its share price shot up from about $2.60 in 2001 to as high as $13 in 2007 - a five-time gain - in the decade-long oil boom which sparked a huge demand for oil rigs.

So, presumably, CapitaLand must be hoping that it is just as astute in its buyout efforts.

But what happens if the privatisation fails? The wave of takeovers over a decade ago throws up a good example of what happens after that.

Some months after Keppel took KepFels and KHZ private, Sembcorp Industries attempted to do the same privatisation feat at Sembcorp Marine. That offer priced SembMarine at $1.10 - and at a similar 20.5 per cent premium over its last traded price before the takeover bid.

However, investors sniffed the nascent commodity boom cycle and decided to hang on to their SembMarine shares. SembMarine initially plunged 24 per cent after the privatisation failed, but then went on to grow from strength to strength, with its share price surging to as high as $6 in 2011.

In hindsight, one lesson which minority shareholders can draw from Keppel and SembCorp's privatisation efforts is that, even without access to any privileged information, the fact that majority shareholders are trying to buy their shares - albeit with a 20 per cent or so premium - means one reason could be that the tide is arguably about to change for the better in the company's business.

But the point to stress is to stay invested in the same business. The line proffered by offerors about giving investors an exit opportunity after they have suffered years of languishing share prices may be a common one. But privatisations are not always made for altruistic reasons.

engyeow@sph.com.sg

[MINX]

CAI JIN
Privatisations: Back to the future

Takeover bids revive debate sparked by similar wave over a decade ago
Published on Apr 28, 2014 1:02 AM



By Goh Eng Yeow Senior Correspondent

PRIVATISATION fever has gripped the market again amid a spate of offers to buy out companies such as Singapore Land, CapitaMalls Asia and Hotel Properties.

The offers are mostly being made on property plays just when their share prices are languishing at sharp discounts to book values.

This, coupled with rock-bottom borrowing costs, makes it attractive for majority shareholders to try to take the firms private.

For older traders, however, concerns emerging over this bout of takeover fever bear an uncanny resemblance to a huge debate triggered by a similar wave of takeovers after the bursting of the dotcom bubble over a decade ago.

For instance, complaints made by minority shareholders over low takeover valuation prices back then have echoes of the indignation expressed by aggrieved investors in the recent takeover bids.

Take this letter from reader Terry Shiau to the Forum pages of this newspaper in 2001: He observed that there should be rules protecting investors who might be adversely affected by companies which listed their subsidiaries when the stock market was strong, and valuations were high, only to privatise them when valuations were low.

In the same vein, retail investor Vincent Khoo recently wrote: "Retail investors need to have confidence in the market and a level playing field. But recent takeovers and privatisation offers treat retail investors and minority shareholders as easy prey."

He cited the instance of RDL seeking to privatise smallish property developer LCD Global Investments at a 47 per cent discount to book value where minority shareholders might have cause to feel aggrieved.

One suspicion is that majority shareholders taking their companies private may have plans which they do not disclose to the offerees. They also possess much more information than a retail investor.

Any advice offered by the independent financial adviser is made with a similar information deficit: They are just hired to give a fairness opinion and do not have full access to future plans.

Still, there may be a few useful lessons which minority shareholders can draw from the 2001 takeover outbreak to help them to decide whether to part with their shares, or to keep holding them in hopes of a market turnaround.

One salient example is Keppel Corp's 2001 privatisation of two of its units - Keppel Fels Energy & Infrastructure (KepFels) and Keppel Hitachi Zosen (KHZ) - using part of the $1.85 billion proceeds from selling its 36.7 per cent stake in Keppel Capital to OCBC Bank.

Keppel paid only $1.55 apiece for KepFels - the unit which later turned the group into a world-beater in rig-building - which priced the takeover target at a 21 per cent premium over its last done price before the takeover.

Now fast-forward in time, and some would say that CapitaLand might be "doing a Keppel" in its proposed $3.06 billion buyout of mall operator CapitaMalls Asia (CMA).

Like cash-rich Keppel before it, CapitaLand's coffers swelled by $1.5 billion after selling its stake in Australia-listed Australand and it is offering CMA shareholders a similar-sized 23 per cent premium to CMA's last-traded share price before the buyout offer.

The KepFels purchase turned out to be one of Keppel's shrewdest moves, as its share price shot up from about $2.60 in 2001 to as high as $13 in 2007 - a five-time gain - in the decade-long oil boom which sparked a huge demand for oil rigs.

So, presumably, CapitaLand must be hoping that it is just as astute in its buyout efforts.

But what happens if the privatisation fails? The wave of takeovers over a decade ago throws up a good example of what happens after that.

Some months after Keppel took KepFels and KHZ private, Sembcorp Industries attempted to do the same privatisation feat at Sembcorp Marine. That offer priced SembMarine at $1.10 - and at a similar 20.5 per cent premium over its last traded price before the takeover bid.

However, investors sniffed the nascent commodity boom cycle and decided to hang on to their SembMarine shares. SembMarine initially plunged 24 per cent after the privatisation failed, but then went on to grow from strength to strength, with its share price surging to as high as $6 in 2011.

In hindsight, one lesson which minority shareholders can draw from Keppel and SembCorp's privatisation efforts is that, even without access to any privileged information, the fact that majority shareholders are trying to buy their shares - albeit with a 20 per cent or so premium - means one reason could be that the tide is arguably about to change for the better in the company's business.

But the point to stress is to stay invested in the same business. The line proffered by offerors about giving investors an exit opportunity after they have suffered years of languishing share prices may be a common one. But privatisations are not always made for altruistic reasons.

engyeow@sph.com.sg

Just to register a note of appreciation to GG for sharing these great articles with everyone. It is a great help to newbie investors like me who are not well informed and unable to appreciate the ramifications of a takeover.

[chialc88]

Agree, I thanks/recognise GG's contribution.

Love Compassion


A Life not Reflected is a Life not Worth Living.

[thinknotleft]

The reporter is looking from the viewpoint of shareholders in the companies being privatised.

If you view from the shareholders of the offerer company (the opposite party), in particular if the offerer is publicly listed, the offer price should be the lower the better. Hence, the management of the offerer, in offering the 'low' price, is doing its job.

While the shareholders in the companies being privatised often cite and wish the offer price to be close to NAV or RNAV for property companies, offering a price close to NAV does not make sense to the offerer. If you are buying an asset at NAV, you might as well consider other options.

If the offerer is to be fair to the shareholders in the companies being privatised and offer a high price, the offerer will not be fair to its own shareholders.

Finally, if you are the shareholders of offerer, using the sale proceeds of one asset to bid for another asset which you have control may imply a few thing. First, the management may have assessed that there's no better use of the cash than to buy back/privatise that asset. Second, the management may be prudent, as the uncertainty is lower if you buy the asset that you already controlled. Third, like the article point out, the management may think that the future of the company being privatised is bright.

Note: I am not vested in the companies mentioned in the articles ie Keppel, Capland, Cap mall asia, Sembcorp etc.

[egghead]

As with all business transactions, there must be a willing buyer and willing seller. For CMA case, there is one willing buyer and many potential sellers. The question is whether there will be enough willing sellers at $2.22 to close this deal.

[opmi]

The reporter is looking from the viewpoint of shareholders in the companies being privatised.

If you view from the shareholders of the offerer company (the opposite party), in particular if the offerer is publicly listed, the offer price should be the lower the better. Hence, the management of the offerer, in offering the 'low' price, is doing its job.

The mgt is not involved in the Offer. The Offeror is the substantial shareholders. It is different. Most of time, the people not doing their jobs are the IDs in a takeover situation. On the contrary, F&N IDs did their jobs to get a higher price for F&N, but those IDs are VIPs who has reputational risks if they screw up. Most IDs just get a scapegoat (IFA) to pass the buck to. These IDs cannot play punk in case their other directorships get affected.

While the shareholders in the companies being privatised often cite and wish the offer price to be close to NAV or RNAV for property companies, offering a price close to NAV does not make sense to the offerer. If you are buying an asset at NAV, you might as well consider other options.

If the offerer is to be fair to the shareholders in the companies being privatised and offer a high price, the offerer will not be fair to its own shareholders.

Nobody is asking to be fairly treated. Minority shareholders are asking for a fair price that reflects the potential value. If Offeror not willing to pay at fair price, then let the company continue as it is.

As said before, the interests of majority and minority shareholders are misaligned in a takeover situation. Then the IDs must cho kang to get the best deal for the company.

Finally, if you are the shareholders of offerer, using the sale proceeds of one asset to bid for another asset which you have control may imply a few thing. First, the management may have assessed that there's no better use of the cash than to buy back/privatise that asset. Second, the management may be prudent, as the uncertainty is lower if you buy the asset that you already controlled. Third, like the article point out, the management may think that the future of the company being privatised is bright.

Note: I am not vested in the companies mentioned in the articles ie Keppel, Capland, Cap mall asia, Sembcorp etc.

How the takeover is funded is irrelevant to the target company minority shareholders.