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 http://www.ipo-book.com/blog/2011/08/30/its-the-liquidity-stupid/ 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.

Conclusion

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.

See related blog posts:

• Investors' Guide to Privatisation Deals
• Case Studies of Unsuccessful Privatisations
• Striking the Privatisation Lottery 4 Times