Boards should address undervaluation of their shares to ensure fairer treatment of minorities

MANY years ago, while reporting on a group of minority shareholders resisting a lowball offer for their company from its parent, a communications professional working for the acquirer attempted to discredit the dissident investors by telling me a dirty little secret about them.

"They are just trying to make money," she grumbled.

The way this communications professional saw it, many of the dissident minority investors were simply trying their luck by pushing for a higher price. Some of these investors may in fact have jumped on the stock only after the deal was announced, in the hope that the offer price would be raised.

It seemed unfair to her that these minority investors were happy to trade the stock among themselves at less than its supposed intrinsic value, but were insisting that the controlling shareholder pay them the full value.

Doesn't the market price of the stock, set by long-term minority investors themselves, reflect the true value of the company? So, shouldn't the controlling shareholder base its offer price on the recent market price of the stock, rather than some potential value of what's in the company?

This narrative about the illicit intentions of greedy minority investors is something I still occasionally hear from hired communications people when they offer "background" on deals that involve companies going private.

It all came to mind over the past week while I was conducting a thought experiment. Instead of looking at privatisation deals exclusively from the perspective of minority investors, as I usually do, I put myself in the shoes of the acquirers just to see if I have been missing anything.

Controlling shareholders have enormous advantages over minority investors. Consequently, when there is a conflict of interest between the controlling shareholder of a company and minority investors, independent directors have a duty to prioritise the interests of the minorities - regardless of whether those minorities have owned the stock for 10 years or 10 minutes.

Yet, even with this crucial legal protection, minority investors often end up feeling that they have been ripped off when companies are taken private by their controlling shareholders. And, independent directors often end up being accused of being in the pocket of the controlling shareholder.

What is the underlying cause of this acrimony? What can corporate boards and regulators do about it?

Lowball offers

One obvious issue is that many locally listed companies have gone private at prices that were well below their book values.

Earlier this month, GL Ltd said a unit of its parent group had obtained 95.62 per cent of its outstanding shares in a voluntary cash offer and will exercise its rights of compulsory acquisition for the rest of the shares.

The offer price of S$0.80 cents per share (raised from an initial S$0.70 cents) was a 17.4 per cent discount to GL's net asset value (NAV) as at Dec 31 of US$0.723 per share.

In another deal that has grabbed attention, Jardine Strategic Holdings is being taken private by Jardine Matheson Holdings at US$33 per share. The price tag is a 43.3 per cent discount to Jardine Strategic's NAV as at Dec 31 of US$58.22 per share.

Elsewhere, Penguin International is the subject of an offer from an entity controlled by its top executives and private equity firm Dymon Asia. The offer price of S$0.65 per share is an 18.1 per cent discount to the company's NAV as at Dec 31 of S$0.7932 per share.

Why are these privatisation deals happening at such low valuations? The simple answer is that much of the Singapore market is trading at low valuations.

Last week, with the Straits Times Index trading less than 1.5 per cent below where it was at the beginning of 2020, before the Covid-19 pandemic struck, 9 of the 30 component stocks of the benchmark index were trading below their NAVs per share.

They were CapitaLand, City Developments, Hongkong Land, Jardine Cycle & Carriage, Jardine Matheson, Jardine Strategic, Keppel Corp, UOL Group and Yangzijiang Shipbuilding.

Across the wider market, 366 of the 772 securities listed in Singapore were trading below their book values. Among them were names as diverse as Golden Agri-Resources, Fraser and Neave, Hutchison Port Holdings Trust, Japfa, Ho Bee Land, Straits Trading, Hong Leong Asia and China Aviation Oil.

Against this backdrop, one could argue that there is only so much independent directors can do to ensure that minority investors are treated fairly when companies go private.

They can - and certainly should - invite competing offers. But, given the chronic undervaluation of stocks in the local market, holding out for an offer that fully reflects a company's intrinsic value might not be in the best interests of minority investors.

Address low valuations

So, should we give independent directors who recommend lowball offers a break? Should investors just get used to being shortchanged in privatisation deals? Not so fast.

The lesson from all this is perhaps that the key to ensuring minority investors are treated fairly in privatisation deals is not to focus on the rules governing such transactions but to address the undervaluation of stocks in the local market.

Why do stocks trade below NAV per share? One possible reason is that corporate profitability - more specifically, return on equity (ROE) - is low or declining. Another possible reason is that companies are not investing their retained earnings in a productive manner.

Over the past decade, Singapore's corporate sector has been adversely affected by a combination of technology-driven disruption, weak commodity prices, and extensive regulatory interference in the real estate sector.

Some companies have taken steps over the past year to reposition themselves. For instance, Sembcorp Industries enjoyed a massive rally last year after separating itself from its beleaguered subsidiary Sembcorp Marine.

Wilmar International also unlocked value by spinning off its Chinese subsidiary, Yihai Kerry Arawana, as a separately listed company.

Last month, CapitaLand unveiled a restructuring that will see its real estate development business taken private by its controlling shareholder while its real estate investment management activities and lodging business remain in the public market under an entity called CapitaLand Investment Management.

Yet, with almost half of the stocks in the local market trading below book value, corporate boards in Singapore clearly have a lot more to do. Until they remedy their lack of attention in this field, they are likely to deservedly suffer the brickbats that come with lowball offers.

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