Thursday, 10 May 2012

Minorities are often the losers in the de-listing, re-listing game

Excellent article by Rita Benoy Bushon, CEO of the MSWG, published in The Star of May 10, 2012.

"Ze Moolah" commented on it in his blog.

I hope the authorities will take notice.

Regulatory conundrum?

THE fact that a growing number of previously publicly traded companies are now seeking to re-enter the stock exchange have compelled me to revisit an issue I have often critiqued in the past: the de-listing and re-listing of companies on Bursa Malaysia.

In recent memory, Maxis Communications Bhd (privatised in 2007) and Bumi Armada Bhd (privatised in 2003) have both rejoined the stock exchange albeit in different forms, while Astro All Asia Networks plc (privatised in 2010) could be making a comeback. Meanwhile, Malakoff Bhd is also considering a re-listing.
While it is entirely within the legal framework to do so, a regulatory conundrum is presented when some major owners de-list their companies at very low valuations only to later re-list them at richer valuations. In such cases, the beneficiaries of these exercises are the corporate advisors and major owners, who profit from each change in direction.

And the losers are the minority shareholders, especially long term ones, who are bought out when the prices offered are low.

Malakoff, when delisted in May 2006, was estimated at RM8.8bil. It has since grown, securing several power projects here and overseas. Clearly, it was de-listed at a time when it was experiencing significant growth in its operations, which minorities were henceforth not privy to.

Bumi Armada was taken private with a price earning ratio (PE) of under four times on a forward earnings basis in 2003. After nearly a decade, it was re-listed last year at a PE of about 20 times despite more dilution due to an ESOS scheme.

Again: why were minority investors forced out at the time? Why were they not allowed to share in the growth story?

These are just two examples that demonstrate the gravity of our concern.

Fundamental investors buy counters for the long term, and plan accordingly. They willingly assume the risks in doing so (especially when a company is still finding its feet early on in its life) so that they may reap the benefits when the fruits later ripen.
But how are we to promote a mature capital market that is founded on the maxim of fundamentals and long term investing and sound corporate governance principles when corporate advisors are able to propose a cheap exit point and a lucrative re-entry point for company's majority owners?

Shouldn't there be a cooling-off period imposed before a company that had been taken private and de-listed is allowed to re-list and some conditions imposed if relisting is allowed, such as the price should not exceed the valuation price when the company was delisted.

Bursa Malaysia, which has often lamented the lack of equity market participation among the young, can take a cue from this. Surveys have revealed that only 12% of investors are in the 20-29 age group, while 59% involve those 40 years and above.

Warren Buffett (net worth US$44bil) bought his first stocks at age 11 three shares in Cities Service Company, now known as CITGO and continues to invest today, at age 81. If we are indeed seeking similar approaches among our young to buy stocks for the long term, why do we allow major owners to list and de-list their companies without imposing conditions?

We have already seen how disadvantageous the compulsory delisting rules are when minimum public shareholding spread thresholds are crossed, minorities have no choice but to throw in the towel.
Surely the authorities are aware that this loophole using the threat of de-listing is being exploited to the detriment of the minorities? Clearly, this loophole must be closed.

As I have often remarked, central to our concerns are the valuations offered. Time and again, we have seen the take-over offers priced at a level which is as near as meaningless to the minority shareholder, especially after some have profited from speculative rises in the counter. Such activity penalises the minority investor, because his or her upside has every potential of being capped while the downside risk remains in its entirety.

On a related issue, SEG International Bhd (SEGi) is the target of a privatisation bid by Navis Capital Partners Ltd and Datuk Seri Clement Hii, who are the largest shareholders with a combined 60% stake.

They are offering to buy out minorities at a significant discount to the stock's fair value and trading price, with the intention of growing SEGi into a regional player.

Is this yet another case of a major owner and its partners muscling out the minorities from a profitable long term future?


  1. By the way I can't understand why these counters will become market favourite when they are relisted?

  2. Certain parties having to do "national service" .....?

  3. I mean the retail investors not those instituition. Btw what's ur comment on Jim Simons and Renaissance Technologies. I found that the flag ship fund's return is ridiculously high but other fund seems like normal hedge fund in Wall Street. They are too good to be true. Are they another Madoff? I think that they hit almost all red flags given by Kenneth Fisher.

  4. Ah, retail investors, sometimes trying for quick IPO gain. Longer term, I don't know, I also don't understand.

    Will try to find out something about Simons and Renaissance.

  5. Hi M.A. Wind and Imenwe!, I found interest in your blog as I have been in the past , read only "where is ze moola"'s blog for some voice of concerns over corporate governance in Malaysia stock market.

    IPOs are certainly a good investing opportunity but unfortunately, this is not guaranteed...

    plenty of information can be found and read in the prospectus but how many people actually able or find the time to read them? and what information is crucial and what are just mere 'noise' ?

    knowing who the underwriters is also important and many more

    In light of countless queries and interest shown for IPO, especially when Facebook and Malaysia's Felda Global IPOs are nearing to conclusion, my mate has recently written an article on how to spot good and bad IPO in Malaysia

    you can read them at this site , well, just sharing! keep up the good work and hope to read more corporate governance from your blog!

    1. Thanks for your kind words, interesting blog, I will link to yours.

  6. To be honest previously IPO is a big no no to me. I prefer companies with proven track record but now I am interested on 2 new companies. One is Bumitama Agri Ltd another one is Integrated Healthcare. For plantation counters SG listed companies are better. Their land bank are larger, trees are younger and much more cheaper compared with Malaysia. The only disadvantage are they have high debt and unable to give good dividend. Most of Felda's tree are too old. After listed they need to spend a lot on replanting. Anyway this my 2cent. Please feel free to comment if there is anything wrong.

  7. My suggestions is to let previous shareholders their rightful shareholding as before, if relisting is made possible. When taking private, major shareholder will claim not to further burden them further risk and so on. Some major shareholders are waiting possible windfall especially certain court decision were made in their favour. What happens when such windfall materialise is anybody guess ?

  8. Interesting suggestion but difficult to execute, and surely the majority shareholders will not agree, they like to keep the windfall for themselves.