Challenger taps Dymon Asia for cash to pursue strategic initiatives without excluding minorities

WHEN Challenger Technologies tried to go private more than two years ago, it told minority investors that the electronics retail sector was saturated, competitive and facing disruption from the rise of e-commerce.

"To navigate this challenging environment, changes to the business may need to be implemented and dividends could be affected during such time," the company said when the proposal was first announced.

Many minority shareholders - including a firm called Pangolin Investment Management - baulked at what they felt was a miserly offer price.

Challenger's chief executive Loo Leong Thye and his family had teamed up with Dymon Asia Capital to take the company private at just S$0.56 per share (before a dividend of S$0.02 per share that was paid out on Jun 3, 2019).

That offer valued Challenger at just over S$193 million, or about 10 times its FY2018 earnings. It also seemed to ignore Challenger's significant net cash position of more than S$63 million.

Challenger's minority investors, led by Pangolin, blocked the proposed voluntary delisting at an extraordinary general meeting (EGM) on Jun 27, 2019.

Now, it seems Challenger's controlling shareholders and Dymon Asia have come up with a plan to reposition the company for the future in a manner that enables minority investors to ride along with them.

On Oct 13, Challenger said Dymon Asia will inject S$32.8 million into the company by subscribing for 56.6 million new shares priced at S$0.58 each - a nearly 15 per cent premium to Challenger's last closing price of S$0.505 before the announcement.

Challenger said the new shares will be issued to Digileap Capital, the same Cayman Islands-registered vehicle that the Loo family and Dymon Asia used in the failed voluntary delisting plan in 2019.

Digileap is now wholly owned by Dymon Asia, and already holds 3.4 million Challenger shares. With the issue of the 56.6 million new Challenger shares, Digileap will own over 14.9 per cent of the company's enlarged number of shares.

Challenger said half of the S$32.8 million in proceeds will be used for strategic investments or possible merger and acquisition deals. The other half will be used for product and business development.

The company made no mention of cutting its dividend as it pursues these initiatives.

Shares in Challenger closed at S$0.545 on Friday, up nearly 8 per cent since the announcement of the deal with Dymon Asia.

Scuppered delisting

When the Loo family and Dymon Asia failed to take Challenger private two years ago, I assumed they would bide their time and try again.

With the company struggling to garner a decent valuation in the market, it seemed logical for its controlling shareholders to take the company private before repositioning the business.

The voluntary delisting proposal also had the support of a key shareholder outside the Loo family, which would have negated the tougher rules that have since been introduced.

Under the rules at the time, a company could delist voluntarily if at least 75 per cent of the shares voted at an EGM were in favour of the resolution and less than 10 per cent were against it.

Even before Challenger's EGM, there was no doubt the 75 per cent threshold would be achieved.

The Loo family held more than 188.4 million shares, or nearly 54.6 per cent of the company's 345.2 million outstanding shares.

A longtime associate of Challenger named Ng Leong Hai, who held nearly 83.1 million or 24.1 per cent of the company's outstanding shares, had also agreed to support the delisting.

In the end, however, the delisting was scuppered by dissident votes breaching the 10 per cent mark.

A total of 318.9 million shares were voted at the EGM, with 282.7 million (or 88.6 per cent) voting in favour of the delisting and 36.2 million (or 11.4 per cent) voting against it.

Counterfactual calculations

Shortly after the EGM, on Jul 11, 2019, the Singapore Exchange announced changes to its rules on voluntary delistings.

Among other things, offerors and their concert parties are no longer allowed to vote on voluntary delisting resolutions. Instead, these resolutions now require the support of 75 per cent of shares held by independent shareholders present and voting at the EGM.

How would this have affected Challenger's bid to delist?

Subtracting the 188.4 million shares belonging to the Loo family from the 318.9 million shares that were voted at the EGM would suggest that 130.5 million shares were voted by independent investors.

Subtracting the 188.4 million shares belonging to the Loo family from the 282.7 million shares that were voted in favour of the delisting would suggest that 94.2 million shares in the hands of independent shareholders were voted in favour of the delisting.

Hence, based on the votes cast at Challenger's EGM, and assuming Ng is treated as an "independent shareholder", the voluntary delisting resolution would have been supported by 94.2 million out of 130.5 million shares voted - or 72.2 per cent, just shy of the 75 per cent threshold.

In short, even with the supposedly tougher delisting rules, the Loo family and Dymon Asia stood a reasonable chance of taking Challenger private if they had tried again, perhaps with a slightly higher offer price.

Interests realigned

With another delisting attempt now looking unlikely, the interests of Challenger's controlling shareholder and those of its minority shareholders have been effectively realigned.

And, with the company focused on working with Dymon Asia to reposition and expand its business, its stock could begin attracting more interest from analysts and investors in the months ahead.

Meanwhile, the impact of Covid-19 and the policy response it elicited is beginning to normalise.

For H1 FY2021 ended Jun 30, Challenger reported a 15 per cent year-on-year rise in revenue to S$135.8 million.

Profit after tax for the six months was S$9.4 million, versus S$9.7 million for H1 FY2020.

This was partly due to tighter gross margins, a S$2.5 million rise in premises expenses due to lower rental waivers, and a decrease of S$0.4 million in sundry income due to lower receipt of government grants.

As at June 30, the company had S$71.7 million of cash on its books - equivalent to about S$0.21 per share.

For FY2020 ended Dec 30, Challenger reported an 18 per cent decline in revenue to S$270.8 million.

Profit after tax came in at S$23.3 million, compared to the previous year's S$17.7 million.

Among the factors that lifted its net profit were a S$4.8 million increase in sundry income due to receipts of government grants, and a S$4.8 million decline in premises expenses due to rental waivers and rebates.

Challenger declared a dividend of S$0.027 per share for FY2020, versus S$0.015 per share for FY2019.