SINGAPORE – When a privatisation offer was made for Indonesian property developer Sinarmas Land at 31 cents per share at the end of March, there was a general sense of outrage among minority shareholders at what was perceived to be a lowball, poor bid price.
The Securities Investors Association (Singapore), or Sias, shared this view. When the independent financial adviser’s (IFA) opinion was released in mid-April, Sias noted that the IFA had said the offer was “not fair”. Sias also disagreed with the IFA’s fair valuation range of 35 cents to 36.1 cents, because these prices represented too large a discount to the net asset value (NAV) per share of 85 cents.
Sias also said it did not endorse the IFA’s advice to Sinarmas’ independent directors to advise shareholders to accept the offer; instead, Sias advised minority shareholders to not only reject the “lowball’’ price but also called upon the offeror to raise its price closer to the NAV.
It is not uncommon for some IFAs to deem an offer as “unfair” or “unreasonable” and yet recommend that the offer be accepted, a development that upsets shareholders. This is despite the fact that the regulatory position is that the offer has to be both “fair and reasonable”. As the major shareholder cannot vote on the privatisation offer, the minority shareholders alone decide on the fairness of it. In many cases, minority shareholders rush to accept a lowball offer.
The IFA handling the Sinarmas offer had initially defended its valuation methodology. But on May 10, the offeror raised the price by 21 per cent to 37.5 cents – a significant improvement. This was after Sias objected to the lowball offer. There are valuable lessons retail investors can draw from the episode.
Always wait for the IFA’s opinion before deciding
From the time the Sinarmas offer was made but before the IFA’s report was issued, shareholders owning some 22 per cent of the company’s shares accepted the original offer of 31 cents. This was disappointing.
This meant that even before the public had an independent assessment of the fairness and reasonableness of the 31 cents, the offeror, who started off with 70 per cent of Sinarmas, had already acquired around 92 per cent of the shares, crossing the 90 per cent threshold for the automatic suspension of trading.
The question shareholders should have asked themselves is: “Why rush to sell?” If the 22 per cent of shareholders who sold were concerned about eventually owning shares in an unlisted entity, they need not have worried since the delisting rules state clearly that exit prices must be both “fair and reasonable” for a company to be taken private.
So, selling early made little difference to the final outcome and in fact could perhaps even have jeopardised the chances of securing a better price.
Furthermore, even if the free float drops below 10 per cent and trading is supposed to be suspended, this does not have to occur immediately since the Singapore Exchange (SGX) has the discretion to suspend the counter or not.
The fact that Sinarmas has continued to trade since April 23 despite its free float falling below 10 per cent is testimony to this. Once again, waiting made more sense.
Carefully evaluate the IFA’s assumptions and make up your own mind
IFAs are professional market participants and no doubt exercise the utmost care and due diligence when arriving at their conclusions.
However, minority shareholders should note that there is a tendency by IFAs to take a cautious approach when it comes to applying certain valuation methodologies. In some instances, as in the case of Sinarmas, the outcome might be perceived to favour offerors.
Sias’ objection to the original price was not only based on the large discount to NAV but also because of a “double discount” that the IFA applied in valuing Sinarmas’ unlisted assets: first, 37 per cent to the sum-of-the-parts valuation and then a further 20 per cent “holding company” discount.
The IFA responded that both are in line with accepted industry practice: the first discount because of the difficulties associated with realising the full value of the assets in private markets, and the second because Sinarmas is only an investment holding firm with little management control over the assets in question. It also said the two discounts are conceptually different or mutually exclusive.
Notwithstanding these arguments, shareholders should note that according to Sias’ estimates, the removal of the two discounts would have increased the offer price by only around 10 cents to 41 cents – still a very generous 52 per cent discount to NAV.
So had the discounts not been applied, minority shareholders would have been much better off – and therefore a lot happier – and the offeror would still have been left with plenty of room to extract value.
The lesson here is that investors should understand that there are many ways to arrive at a fair and reasonable price. They should therefore question the reasonableness of all assumptions when presented with an opinion and make up their own minds before acting. They should also take heed of the guidance given by Sias or seek advice from a financial adviser in these cases.
Base decision on your financial position
It is worth remembering that an exit offer which is unattractive to one person may be attractive to another because everyone’s entry point into the stock and financial position is different.
After evaluating what is on offer together with the IFA’s opinion and Sias’ input if any, then and only then should shareholders make a decision on their shares, taking into consideration their own unique circumstances.
In the final analysis, the only way to ensure higher exit prices is if all minority shareholders band together and explicitly reject offers that are thought to be too low, thus forcing an upward revision.
Although ideal, the reality is that achieving this may be difficult.
Until a better solution is found, minority shareholders should try to familiarise themselves with the issues surrounding privatisations and delistings – and Sinarmas makes a good case study.
- The writer is president of the Securities Investors Association (Singapore).
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