RTOs, M&As and the allure of change

Singapore

CHANGE is never easy, yet it oozes promise as the new replaces the floundering old, setting off the scent of something better, stronger and more powerful. Such is the allure of reverse takeovers (RTOs) that has seduced investors here time and time again.

Singapore has had its fair share of sweeping corporate transformations: an ailing steel trader, Albedo Group, and a furniture maker, Cacola Furniture International, hopping onto the property bandwagon; a funeral service provider, Asia Pacific Strategic Investments, digging around gold mines; and a ceramic maker, NH Ceramics, burnishing itself as an energy powerhouse.

Transformation happens when private firms seek backdoor listings using the carcass of the struggling listed entity. Often, the listed company issues new shares to buy the assets of the private group, resulting in a change in business and ownership as well as diluting the shell company's existing shareholdings. Unlike initial public offerings (IPOs), backdoor listings are poorly researched and understood, creating opportunity for speculators.

The Business Times looked at some of the higher-profile RTOs over the years. Of the 47-odd RTOs announced since 2008, 19 were completed, 20 were cancelled and eight are still pending (see table). Rowsley, previously known as aspnetcentre, a loss-making IT systems integrator, is one company that has changed its profile over the years.

After the dotcom bust, it shed all its IT-related businesses to become an investment company, venturing into the lottery business in Mongolia and paper and paper packaging business in Indonesia. When alternative energy sources were seen as the next "in" theme, the company entered into a proposed $2.7 billion RTO with a Chinese solar-energy firm, which subsequently fell through. These days, Rowsley is busy with its purchase of architects RSP Group and the 9.23-hectare Vantage Bay waterfront project in Iskandar Malaysia.

"All it takes is one or two successful RTOs to get the market excited about subsequent ones. The flavour changes. At one time, it was China play. Now it's mining and Iskandar," Jinshu Liu, an analyst at Voyage Research told The Business Times.

But not all RTOs pan out. And those which are completed may not translate to a success down the road. RTOs, by their nature, can be quite speculative, giving rise to wild share price fluctuations.

"You are looking at projects with long gestations. There will be uncertainties," said a research head at a foreign institution, citing the example of Catalist-listed Albedo, which had entered an RTO deal with Malaysia's Infinite Rewards to develop agricultural land earmarked for development over 12 to 15 years.

According to The Australian Financial Review, a research by Peter Lam of UTS Business School found that shell companies often provided much stronger share price gains during takeover.

The research found that there may be significant opportunity for speculators who invest in backdoor-listing candidates before the market speculates on a reverse takeover, or news is announced. Investors who buy into the backdoor listing during or soon after its reinstatement to official quotation, or through a capital raising, risk getting slaughtered by legacy shareholders who dump their stock.

Yet, it is interesting that investors take to planned RTOs like they are done deals destined for success.

"Many Singapore retail investors still make decisions based on market sentiment, rather than on an informed understanding of the facts," said Stefanie Yuen Thio, joint managing director at TSMP Law Corp.

And when their big payoff does not materialise, they blame the regulators for not preventing their loss. That's not how the market operates, Mrs Thio said.

"If you're going to make a speculative investment (before the RTO is a sure thing), then your risk or reward will necessarily be commensurate with that. Investors need to understand all the facts and make an informed decision," she cautioned.

Mr Liu of Voyage Research reckons it boils down to due diligence done: "Look at value, growth potential, prospects. Look at available research to mitigate risks. There is no free lunch."

But critics say backdoor listings, with their capital reconstruction and raising exercises, are sometimes hard to value, while a lack of easily accessible information on them compared to IPOs can make analysis challenging. They also lament the fact that RTO announcements and abortments can become easy tools used by some to manipulate a company's share price.

Mrs Thio disagrees, saying that the due diligence and disclosure requirements in an RTO are just as rigorous as in an IPO.

"While there's no prospectus in the case of an RTO, the Shareholders' Circular must contain the same degree of detail, and the management team and professional parties are expected to exercise the same degree of diligence, as in an IPO," she said.

Neither is it in the board's interest to have an RTO fall apart given the potentially negative impact on the company's share price and board members' business credibility.

For investors still attracted to RTOs, Dr Lam's research has identified common characteristics in successful backdoor listings. The larger ones tend to perform better than smaller ones, presumably because more substantial assets are injected into the listed shell. Backdoor listings accompanied by capital raising also did better; a private placement to sophisticated investors may suggest that "smart money" is backing the deal.

Still, it is up to the investing public to weigh the factors and make their investment decisions in a considered and informed way.

"The twin pillars of disclosure and informed decision-making underpin the caveat emptor philosophy," said Mrs Thio.