Friday, 25 April 2014

Minorities' right to expect full value

In Malaysia low privatisation offers by the large majority shareholder are quite common. The problems are:

[1] no competing offers;
[2] independent directors should maximize returns for all shareholders;
[3] minority shareholders should stand up and fight.

It seems that in Singapore there is a very similar situation.

The first relevant article is by Michael Dee, former regional CEO for Morgan Stanley and senior managing director for Temasek Holdings, it can be found in the Valuebuddies forum.

CMA shareholders should stand their ground against 'fair offer'

CMA is a cash cow and is worth much more than that

THE CapitaLand (CL) offer for the 35 per cent of the CapitaMalls Asia (CMA) shares they do not own is yet another example of the lack of respect for minority shareholders. The post-IPO performance of CMA shares and the paltry premium over the IPO price and book value multiple should concern all CMA shareholders.

At the November 2009 CMA IPO, all of the proceeds went to CapitaLand and none were invested into CMA. Thus the IPO and current offer are just asset trades for CL with no strategic benefit for CMA shareholders. Prior to the IPO, CL shares peaked at $8.60 and during the financial crisis fell almost 80 per cent. A few months later, CMA's IPO was priced at $2.12, closed the first day at $2.30 and the multiple of book value offered was 1.55x. The current offer of $2.22 is valued at a thin 1.2x book value.

Yet, now more than four years later, CL wants to pay only a 4.7 per cent premium to the IPO price, a 3.4 per cent discount to the day one closing price and a 23 per cent discount to the IPO book value multiple. Has CMA really deteriorated that much over the last four years?

At the time of the IPO, CMA had 59 completed projects and today there are 85, a 44 per cent increase. In 2013 vs 2012, revenue, profit and the asset value per share were all up about 10 per cent and operating income increased a whopping 40 per cent. Looking back to the IPO, in 2009, profit was $388 million and for 2013 it was $600 million, an increase of 55 per cent. Total equity in 2009 was $5.5 billion and at year-end 2013, it is $7.2 billion, more than a 30 per cent increase. So operating performance since the IPO has been quite strong and hardly justifies a discounted multiple to book value and a discount to the closing price after the IPO.

CL will stress the offer price is at a premium to recent closing prices. Yet this is illusory as CMA is worth more than its market values and worth much more to CL than the offer price. CMA shares hit a high of $2.66 within days of the IPO on Dec 7, 2009. Two years after the IPO, the shares had fallen 60 per cent to a low of $1.13, while during the same period, the STI was unchanged. Within a few months of the IPO and aside from a few weeks in 2013, the shares traded below the IPO price about 90 per cent of the time. Even today, after the offer, the STI has still outperformed CMA's share price by 35 per cent since the day one close. Most of the dividends have gone to grow the business and reinvest in new projects, yet current investors are not being compensated enough for those investments and the projects currently being developed.

CMA is 65 per cent owned by CL and at least one of the independent directors also sits on CapitaLand's board. Additionally the chairman of CapitaLand and CapitaMalls Asia are the same person. Thus the majority of the Board should not be considered independent in the transaction as five of 10 board members have direct ties to CL. CL has had direct control strategically and operationally of CMA as a public company. This includes a healthy conflict of interest as noted among the 26 pages of Risk Factors of the IPO prospectus; "We cannot assure you (potential CMA investors) that the interests of our (CL) existing Reits or private real estate funds will not conflict or be subordinated to our (CL) interests in such circumstances. Furthermore, we cannot assure you (CMA Shareholders) that conflicts of interest will not arise in future . . ."

As a minority shareholder, the odds are stacked against you. When a 65 per cent shareholder has to decide whether to put minority or their own shareholders first, it is clear that CL comes first. You were warned at the IPO.

CL investors, including Temasek, should wonder why CL is not buying their own shares that are trading at only about 0.8x book value. Is it really the case that the CMA offer is so cheap that it is a better investment than buying CL shares at a 20 per cent discount to book value instead of CMA's 20 per cent premium?

Clearly the market sees the unique value in CMA, value that is not being provided to CMA shareholders. Just look at the CL share price since the CMA offer. Investors and analysts in CL have bid up the CL share price almost 10 per cent, to a level not seen for almost six months.

CL wants to attain 90 per cent so as to delist CMA. This means buying at least 25 per cent of the outstanding shares. No doubt an IFA (independent financial adviser) can be found to give a "fairness" opinion. However there is a big difference between a minimally acceptable fair offer and receiving the full value of the company. CMA investors should expect the independent directors to maximise the value they receive and not just accept a price deemed "fair". But who is negotiating on behalf of CMA shareholders to get the best price?

CL wants to buy CMA as cheaply as possible because it is a great asset. In short, CMA is a cash cow and is worth much more than they are offering now. Shareholders should be prepared to stand their ground in order to attain the full value for giving up their share of the company. CMA is very profitable and has strong dividends so even if CL walks away, the minorities are left with a good yielding asset. The China assets are increasingly valuable now that the government is focused on increasing consumption and domestic demand. CMA shareholders should be happy to hold onto their shares.

One hopes the independent directors will represent only the minority investors to the full extent of maximising the economic potential for shareholders. Since CL has now shown they are negotiating solely on their own behalf, it is up to the minority shareholders to make their decisions about whether they are getting full, fair or inadequate value. As a general matter, if minority investors won't stand up for their rights then they can expect even more poor performance from the majority managers of their assets.

The second letter is at Business Times, partly behind a paywall:

I refer to "Privatisation unhappiness: market is to blame" (BT, April 23), which says in effect that markets fluctuate so you have to take the good with the bad when it comes to takeover offer valuations. I could not disagree more stridently.

What the column fails to take into consideration is that the current rash of takeover complaints deals with a unique class of takeovers - those where a controlling or majority shareholder or consortium who is in control of the corporate entity, makes an offer for the minority shares they do not own. It is a whole different game when a shareholder or group of shareholders are in control of the value of the offer.

Consider this: Temasek used to own 15 per cent of F&N. If it made a bid for the outstanding shares it did not own, would a bidding war have erupted with the velocity we saw last year? Will we see a bidding war for CapitaMalls and Olam, etc? Most certainly not. However, Temasek sold its shares in July 2010 and thus a bidding process was able to unfold whereby all F&N shareholders received the full market value possible, but only because there was competition for the asset.

Now contrast that with today's deals. What bidder is going to emerge for the minority shares with the controlling shareholder(s)? The Temasek consortium controls 52 per cent of Olam and CapitaLand controls 65 per cent of CapitaMalls Asia (CMA). No other bidder is going to step up to drive an undervalued company to its maximum shareholder value. As the article points out, there is no chance the controlling shareholders are going to make a bid at full value - why should they?

The third article is the response from the SIAS on this matter.

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