Monday 26 January 2015

Poker Game Over CH Offshore & UE E&C

After the last poker game (i.e. privatisation offer) with Capitaland over CapitaMalls Asia in Jun last year, I was invited to another 2 poker games, this time over CH Offshore and UE E&C. How should I play these 2 poker games to extract maximum value from them?

CH Offshore

This game should end very soon, with the cash offer from Falcon Energy at $0.495 expiring on Mon at 5.30pm. The Independent Financial Advisor recommended that shareholders should reject the offer or sell the shares (if they so wish) in the open market if they could get a higher price. The largest shareholder, Chuan Hup Holdings, has also announced that they would not accept the offer. In fact, they have even increased their stake in the company. 

For me, a key consideration for not selling is the fact that the revalued Net Tangible Asset (NTA) of the company is $0.571. Moreover, if the company could recover a trade receivable of US$44 million, the NTA could go as high as $0.653. CH Offshore has also paid generous dividends in the past, averaging 3.58 cents in the past 3 years. Furthermore, CH Offshore had traded as high as the offer price, so if I had really wanted to sell, I would have done so long ago. Hence, the offer of $0.495 is not attractive. 

The only possible reason for selling is that I have quite a lot of oil-related stocks, as mentioned in My Oil Stock Adventures. This cash offer thus offers me an opportunity to reduce my exposure to oil prices, which is still trying to find a bottom. However, considering that Falcon Energy, which is also in the offshore marine industry, still chose to proceed with the cash offer despite oil prices having fallen by 40% from its peak in Jun by the time of the cash offer announcement suggests that they know there is value in CH Offshore. If an industry expert such as Falcon Energy thinks CH Offshore is valuable, minority shareholders like myself should take heed. So, after considering all the above factors, I'm not accepting the offer. 


UE E&C is the more exciting game as the outcome is more open. The offerer, Southern Capital Group, offered to privatise UE E&C at $1.25. The offer will expire on Wed at 5.30pm. But as at last Thu, it has only managed to acquire 79.05%, still 10.95% short of the level needed to exercise the rights to compulsorily acquire all the shares. It is unlikely to reach this level, as a shareholder has emerged to become a substantial shareholder and increased its stake to 9.20%. Unfortunately, there is no possibility of the offerer increasing the offer price, as it is declared as final. Shareholders either have to accept the offer, sell in the open market, or reject it and risk the shares being suspended and/or delisted. The combined shareholding of the 2 largest shareholders is now 88.25%, with only 11.75% left in the hands of the public. If the public shareholding falls below 10%, the shares will be suspended. To avoid being caught in the no-man's land where the shares may be delisted, I will use the same approach as I had with CapitaMalls Asia, i.e. to accept the offer only partially, such that the proceeds from accepting the offer is sufficient to cover the cost of all the shares that I own. See The Last Stand on CapitaMalls Asia for more info.


Generally speaking, all of us can have different views of the intrinsic value of a company. But when an expert comes along and offer to acquire a company that you own, you can be sure that you have a gem in your portfolio. This expert can be an industry expert, as in the case of Falcon Energy with its cash offer for CH Offshore, or a financial expert, as in the case of Southern Capital Group with its privatisation offer for UE E&C. Granted, they might be able to restructure the company to maximise its value in a way that the original management could not do, but the fact that they see value in the company at the offer price means that the company is more valuable than the offer price suggests. So, why the need to accept the offers?

Also, the conventional market wisdom suggests that the current share price is supported by the offer and if the offer were to expire, the share price would fall below the offer price. My opinion is it should not (assuming there is no change in the prospects of the company), because firstly, the offer already tells us that some expert thinks the company is worth more than the offer price, and secondly, those who want to sell would have accepted the offer, rather than wait until the offer expires and sell in the open market at a lower price. There is some proof of this, in the cash offers for Olam and Hotel Properties (HPL). After the close of the offer at $2.23 in May 2014, Olam's share price dipped below the offer price for a few days and then rebounded, closing as high as $2.69 in Sep 2014. Likewise, HPL's price dipped slightly below the offer price of $4.05 for a few days after the close of offer and rebounded, closing as high as $4.41 a month later. So, again, why the need to accept the offers?

Generally, I think we investors are short-changing ourselves in privatisation offers. We should stop doing so.

See related blog posts:

No comments:

Post a Comment