Sunday 25 May 2014

Case Studies of Unsuccessful Privatisations

In an earlier blog post on Are Investors Short-Changing Themselves Over Privatisation Deals?, I had discussed 3 cases of unsuccessful privatisations and commented that investors who had rejected the privatisation offers had generally fared better than those who had accepted the offers. A search on the internet revealed that there are more unsuccessful privatisations on the Singapore Exchange than initially thought. In this blog post, we will do a more comprehensive study of the outcome of unsuccessful privatisations.

The table below shows the companies that have at least one unsuccessful privatisation and compares the offer price with the current stock price plus all dividends received to-date since the close of the privatisation offer. The table also shows the returns investor would get from rejecting the privatisation offer and holding the shares till today. 2 of the companies (namely CK Tang and Pertama) were eventually successfully privatised and the successful privatisation offer price is used to compute investors' returns had they rejected the earlier privatisation offer. Another 2 companies (namely CK Tang and Nera Tel) have 2 unsuccessful privatisations. Only the later privatisation offer is used to compute the overall average and median returns from these unsuccessful privatisations.

Company Offer Timeline Offer Price Current Price Total Dividends Total Returns %
CK Tang Nov 03  $   0.420  $   0.830  $   0.003  $   0.833 98% Privatised at $0.83
CK Tang Jan 06  $   0.650  $   0.830  $   0.003  $   0.833 28% Privatised at $0.83
China MZ Sep 13  $   1.120  $   0.895  $   0.010  $   0.905 -19% Reinstated free float
Eastern Jun 12  $   0.180  $   0.290  $        -    $   0.290 61%
F&N Jan 13  $   9.550  $   3.090  $   7.790  $ 10.880 14% Reinstated free float
Guocoleisure Jan 05  $   1.250  $   1.065  $   0.185  $   1.250 0%
K1 Ventures Jun 12  $   0.135  $   0.177  $   0.085  $   0.262 94%
Kingboard May 09  $   0.210  $   0.185  $   0.006  $   0.191 -9%
KS Energy Jun 11  $   1.070  $   0.445  $        -    $   0.445 -58% 1-for-4 Rts @ $0.41
KT&T Mar 02  $   1.100  $   1.745  $   0.563  $   2.308 110%
Nera Tel Feb 12  $   0.450  $   0.735  $   0.140  $   0.875 94%
Nera Tel Nov 12  $   0.490  $   0.735  $   0.100  $   0.835 70%
Pertama Jun 11  $   0.650  $   0.650  $   0.086  $   0.736 13% Privatised at $0.65
SembMar Jun 02  $   1.100  $   4.030  $   1.670  $   5.700 418% 2-for-5 Bonus
STATS Mar 07  $   1.750  $   0.505  $   0.340  $   0.845 -52%
Vard Jan 13  $   1.220  $   1.005  $        -    $   1.005 -18%



Based on the above 16 cases of unsuccessful privatisations, dissenting shareholders stood to gain from 10 of them. The gain ranges from 13% to 418%. 5 of the unsuccessful privatisations resulted in losses for the dissenting shareholders. The loss ranges from -9% to -58%. One of the unsuccessful privatisation had no gain or loss for the dissenting shareholders. Overall, the average gain for dissenting shareholders is 47% and the median gain is 14%.

Of the above companies, 2 companies (namely China Minzhong and F&N) could have been privatised as their free float at the close of the takeover offer had fallen to below 10%. The majority shareholders decided to retain the companies' listing status and sold off shares to increase the free float to above 10%. This depressed the share price after the close of the takeover offer. If these 2 companies were excluded, the average and median gain for dissenting shareholders would be 55% and 21% respectively.

Based on the above information, it is tempting to conclude that shareholders are generally better off rejecting the privatisation offers. However, a closer look at the companies that have performed extremely well or poorly after their privatisation offers shows that it is ultimately the performance of the business that determines whether dissenting shareholders gain or lose by rejecting the offer. Shareholders should therefore review the prospects of the companies in deciding whether to accept or reject the privatisation offer.

If you are aware of any unsuccessful privatisation that is not listed in the table above, please let me know so that a more complete study could be carried out. Thanks.

P.S. I am vested in CapitaMalls Asia, which is the subject of a privatisation offer by Capitaland.

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Sunday 18 May 2014

Playing Poker With Capitaland Over CapitaMalls Asia

In my last 2 blog posts, I've discussed whether investors are short-changing themselves in privatisation deals by giving up long-term gains in return for quick short-term gains. I am a shareholder of CapitaMalls Asia (CMA), which is the subject of a privatisation offer by Capitaland. As you would have guessed, I am not in favour of the privatisation, even though it would have yielded me a gain of 65% (based on the final offer of $2.35). Let us look at the stakes, the cards on hand and the moves Capitaland has made so far.

The Stakes

CMA is the only shopping mall developer, owner and manager listed on the Singapore Exchange. Its business model involves developing and/or procuring shopping malls, managing them and subsequently selling them to the 2 Real Estate Investment Trusts (REITs) under its management. The proceeds from the sale is then recycled to develop and/or procure new shopping malls. In this process, it makes a profit from the sale of the shopping mall and from the management of it under the REITs. This business model brings both lump-sum development profits as well as regular management fees. 

For the latest Financial Year (FY) 2013, CMA earned $614M or an Earnings Per Share (EPS) of 15.4 cents. Its Net Asset Value (NAV) is $1.87 as at end Mar 2014. Based on the assessment by the Independent Financial Advisor advising the independent directors of CMA on this privatisation deal, the adjusted NAV of CMA is between $2.28 to $2.35. Most of the increase comes from the management fee business, which contributes an additional $0.28 to $0.35 to the adjusted NAV.

Capitaland's Cards

The reasons Capitaland has offered in the Offer Document for privatising CMA are as follow:
  • Fully integrating CMA significantly enhances Capitaland's competitive strengths in integrated developments
  • Simplify Capitaland Group's organisational structure
  • Increase Capitaland's financial flexibility and scale
  • Unlock shareholder value and achieve synergies
  • Bring benefits to CMA's operations

The key purpose of assessing the reasons is to determine how keen Capitaland is willing to privatise CMA and hence how willing is it to offer a higher price (at a later period) to fully privatise CMA. (Note: The latest offer of $2.35 is a final offer, meaning the price will not be increased further in this privatisation attempt. Nevertheless, if the privatisation fails, Capitaland can carry out another privatisation attempt in another 6 months from the close of the initial offer). 

On the first reason, Capitaland mentioned about the "OneCapitaland" strategy in developing integrated developments comprising residential, retail, office and serviced apartment units. Even if the privatisation fails, the "OneCapitaland" strategy would still be intact and hence, this is unlikely to drive Capitaland to privatise CMA at all costs. Similarly, the second, third and fifth reasons are not strong enough reasons to up the privatisation offer.

On the fourth reason, it was mentioned that a full privatisation of CMA would raise Capitaland's EPS for FY2013 by approximately 21.5% and improve the return of equity from 5.4% to 6.7%. This is a strong reason for privatisation. On the announcement of the privatisation offer, Capitaland's share price jumped from $2.92 to $3.11, an increase of 6.5%. This shows that Capitaland's investors are in favour of the privatisation.

Capitaland's Moves

On 16 May, about a month after the privatisation announcement, Capitaland raised its offer price. The move was likely prompted by a low acceptance rate of just 2.6%. The announcement can be broken down into 3 parts, namely:
  • Increase in offer price from $2.2025 (ex-dividend) to $2.35
  • Declaring it as the final offer price
  • Making it unconditional

The increase in offer price is to sweeten the deal, especially for investors who subscribed for the Initial Public Offer at a price of $2.12 in Nov 2009. At the original offer price of $2.22 (cum-dividend), the gain works out to be only 4.7% for a holding period of 4.5 years or an annualised gain of 1.0% excluding dividends. Raising the offer price increases the holding period gain to 10.8% or an annualised 2.3%.

Declaring the offer price as final as the effect of persuading shareholders that there would not be any further increase in offer price and convincing them to accept the offer. It also has the opposite effect of tying the hands of Capitaland should the acceptance rate remains low.

Under the original offer, the offer would be declared unconditional only if Capitaland were to hold more than 90% of the shares. By declaring the offer unconditional, Capitaland is buying whatever amount shareholders are willing to sell to it, even if it fails to privatise CMA. This probably indicates that CMA is highly valued in Capitaland's plans.

The market response to Capitaland's raise of offer price was a mere 1 cent drop. By increasing the offer price from $2.2025 (ex-dividend) to $2.35, Capitaland is paying an extra $170.3M. Based on Capitaland's share capital, this represents an additional cost of 4 cents per Capitaland's share. This shows that investors do not mind Capitaland paying a higher price if it can fully privatise CMA.

My Moves

Like all privatisation deals, there is a risk that the share price would drop to the $1.70 level before the privatisation announcement if the deal falls through. After reviewing the stakes, Capitaland's cards and its recent moves, my assessment is CMA is fairly valued at $2.35. However, it appears that CMA is highly valued in Capitaland's business strategy. Moreover, Capitaland's investors do not mind it paying a higher price to fully privatise CMA. Furthermore, if CMA is privatised, we would lose another company to invest in. In recent years, we have already lost a lot of good companies to invest in. Hence, my current position is to reject the offer. By declaring the offer unconditional, shareholders who are willing to sell at $2.35 would already have accepted the offer. Shareholders who are unwilling to sell would not sell at a lower price on the market after the close of the offer.

Having said the above, there is a no-man's land if Capitaland manages to own more than 90% of the shares but less than the level where it could compulsorily acquire all the shares. The shares would become suspended and possibly delisted. The boundary of the no-man's land in this case is between 90% and 96.5%. In the event that the acceptance level is likely to cause Capitaland's ownership to be in this no-man's land, I will accept Capitaland's offer.

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Sunday 11 May 2014

Investors' Guide to Privatisation Deals

Privatisation deals on the Singapore Exchange (SGX) are usually successful as investors are keen to cash in on the premium over the market price prior to the deal. In my last blog post, I discussed whether investors are short-changing themselves by giving up long-term gains in return for quick short-term gains. In this post, we will dissect the various types of privatisations and explore whether investors should agree to the privatisation.

Privatisation by Parent Company

In this type of privatisation, a parent company will offer to buy out all remaining shares of a listed subsidiary that it does not already own. In most cases, the parent company would already have majority control of the subsidiary prior to the privatisation deal. Recent examples of such companies include Singapore Land and CapitaMalls Asia. Since the parent company already has majority control, the main reason for the privatisation could be because the subsidiary is undervalued by the market, hence, it makes sense to buy more of an undervalued subsidiary. In such a case, investors should reject the privatisation unless a good price is offered.

There are also privatisations by majority shareholders who want to take the company forward in a different direction. In such cases, investors should ask why the company cannot move in the new direction as a listed company. Granted, it is tedious and slow to seek shareholders' approval for changes in the company's business directions, but that should not be a good reason to deprive minority shareholders of a money-making opportunity. Investors should reject such privatisations unless a good price is offered.

A unique group of privatisations is by China companies listed on the SGX, which delist from the SGX only to be relisted overseas at much higher valuations. Examples of these companies include Man Wah, Sihuan Pharma and Want Want. Most of the China companies on the SGX are trading at low values as a result of poor corporate governance in some of the companies. Without privatisation, the shares would have continued to trade at low values, unless there is a change in trading environment for these companies. Thus, for these type of companies, it is reasonable to agree to the privatisation.

Leveraged Buy-out

In this type of privatisation, a private equity fund will offer to buy out a company that they think is capable of generating large free cash flows. The company could either be generating large free cash flows now or has the potential to do so but is currently bloated. After succeeding in privatising the company, the private equity fund will load the company with large debts and extract most of the cash from the company. The company is left with little cash but lots of debts. In order to meet its debt obligations, the company will cut all unnecessary costs and the free cash flow generated is used to pay down the debts. After a few years, when the company has become leaner and paid down the debt to a satisfactory level, the private equity fund may choose to exit from the company by listing the company again. Examples of companies taken over by private equity funds include Amtek and MMI. In particular, Amtek was delisted in Aug 2007 and relisted in Dec 2010.

For companies that are generating large free cash flows, investors should reject the privatisation so as to enjoy the free cash flows generated, unless a good price is offered. But for companies that are bloated and have the potential to generate large free cash flows, it is better to cash in on the privatisation as the company would remain bloated without any change in management.

Business Integration

There are companies that take over other companies because they see synergies in both companies' operations. Examples of such takeovers include Frencken acquiring ETLA and Juken Technology and SATS acquiring Singapore Food Industries. When the takeover is successful, both the acquirer company and target company could leverage on each other's capabilities and/or cross-sell to each other's customers, thereby creating more value. As the increased value of the target company could only be realised as part of a bigger company, shareholders should agree to the privatisation at a reasonable price. They could consider buying shares in the acquirer company if it is listed, but the acquirer company should be studied on its own merits rather than just because it is taking over a company.


Privatisations happen for many reasons. Investors should assess whether they could maximise their value in the target companies by keeping them independent. If they are able to, they should reject the privatisation unless a good price is offered to compensate for the loss of future profits. If they are unable to, they should accept the privatisation at a reasonable price.

P.S. I am vested in CapitaMalls Asia and Frencken.

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Sunday 4 May 2014

Are Investors Short-Changing Themselves Over Privatisation Deals?

In recent weeks, there has been a wave of privatisation deals, with recent ones being Singapore Land, CapitaMalls Asia and Hotel Properties Ltd. This trend is actually not new, with many companies being privatised over the years. Since 2009, a total of 129 companies have been delisted, either due to privatisation or failing to meet the listing requirements of the Singapore Exchange (SGX). You can view the list of delisted companies here. While privatisation deals have offered investors a quick gain in the short run, are investors short-changing themselves in the long run? After all, if the target company is not a good company to begin with, why would any shareholder pay a premium over the market price to privatise the company? Let us consider the issue from 3 perspectives.

Unsuccessful Privatisations

Unsuccessful privatisations tell us directly what would happen to the company had the privatisation fall apart. Unfortunately, there has not been many unsuccessful privatisations on the SGX. The more well-known one was the proposed privatisation of SembCorp Marine (SCM) by SembCorp Industries in Jun 2002. The price offered was $1.10 per share, which was a premium of 23% over the then last transacted price of $0.895. The current market price of SCM is $4.06. Between Jun 2002 and now, shareholders have received a total dividend of $1.67 (not adjusted for the bonus issue) and a 2-for-5 bonus issue in Sep 2007.

A more recent case of an unsuccessful privatisation involved Pertama Holdings. However, in this case, the initial privatisation attempt in Jun 2011 ended in suspension of the company's stock as the free float was reduced to less than 10%. Hence, we are unsure how the company would have performed had it continue to be traded. After being suspended for 1.5 years, the company was eventually privatised and delisted at the direction of SGX in Jan 2014 at the same exit offer of $0.65 as the initial privatisation attempt.

There was another case of a near-privatisation as a result of a bidding war between 2 parties. The subject of the bidding war was F&N in late 2012. The bidding war ended with the winning party acquiring 90.32% of the company's shares. This was sufficient to suspend trading of the shares, which could further lead to privatisation. In this case, the majority shareholder reduced its shareholding to below 90%, enabling the company to continue trading. Since the conclusion of the bidding war in Feb 2013, the company has paid a total dividend / capital reduction of $3.85 and a 2-for-1 spin-off of Frasers Centrepoint worth a total of $3.35. In total, it has returned to shareholders $7.20. It was last traded at $3.06. Compared this with the final takeover offer of $9.55, shareholders would have gained $0.71 or 7% more had they not accepted the takeover bid.

Performance of Acquirer Companies

After successfully taking over a company, the performance of the target company is partly reflected in the performance of the acquirer company. If the target company was a good company, the performance of the acquirer company would be improved. Here, we have a few more examples. The most well-known example would be the privatisation by Keppel Corp of all its marine-related subsidiaries, namely, Keppel FELS and Singmarine. The roaring oil rig business that Keppel Corp is doing now was part of Keppel FELS' business.

We have also seen how well the 3 local banks have performed since DBS' acquisition of POSB, OCBC's acquisition of KeppelTatLee Bank and UOB's acquisition of OUB. However, in this case, it has to be said that the smaller banks might not have been able to compete with the larger banks and performed as well had they remained independent.

Other examples of successful takeovers or mergers are:
  • Auric Pacific acquiring Food Junction
  • Frencken acquiring ETLA and Juken Technology
  • Hiap Hoe acquiring SuperBowl
  • SATS acquiring Singapore Food Industries
  • United Engineers acquiring WBL Corporation

Readers have to assess for themselves if these target companies have been good acquisitions for the acquiring companies. If so, would they have done equally well had they remained independent.

Privatisation for Overseas Listing

There have also been a few companies that have been privatised from SGX only to be listed overseas. These are mostly China companies such as Man Wah, Sihuan Pharma and Want Want. Others have also delisted from SGX but kept their listings in the Hong Kong Stock Exchange, such as China Animal Healthcare, China XLX Fertiliser and Sound Global. There is an article at that discusses this issue. In it, it was mentioned that Want Want had increased its market capitalisation from US$3 billion from the time of delisting to US$11 billion in August 2011. Sihuan Pharma had also seen its value increased 10 folds since delisting.

It has to be said it can be difficult for Singapore investors to maximise value in these companies by not agreeing to the privatisation. Most of the China companies are trading at low values as a result of poor corporate governance in some of the companies. Without privatisation, the shares would have continued to trade at low values, unless there is a change in trading environment for these companies.


Having discussed the performance of companies that did not managed to be privatised, acquiring companies that have privatised other companies and companies that delisted only to be listed elsewhere, it can be seen that generally, privatisation has been a good deal for the majority shareholders that undertook the privatisation. While privatisation has offered a quick return for minority investors, have investors shortchanged themselves by killing the goose for the golden egg?

P.S. I am vested in CapitaMalls Asia and Frencken.

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