No rush to privatise ahead of rule changes; rising cost of debt should make listed status attractive

MARKET watchers do not see majority shareholders rushing to make privatisation offers ahead of rule changes that make compulsory acquisitions more difficult. Other factors are likely to play a bigger role in privatisation decisions, they said, including the rising cost of debt.

Following a public consultation, the Ministry of Finance and the Accounting and Corporate Regulatory Authority intend to amend the Companies Act to raise the bar for controlling shareholders wishing to privatise companies. (*see amendment note)

The amendment, which would first need to be tabled for debate in Parliament, would make it more difficult for shareholders owning a large chunk of a Singapore-listed company’s shares to compulsorily acquire the shares of dissenting minority shareholders.

Several privatisations that took place over recent years, at offer prices significantly below book value, might not have succeeded.

But Matthias Chan, head of research at SAC Capital, said the decision to privatise a company is unlikely to be taken “flippantly” based solely on an impending rule change.

Also, as the cost of debt increases, equity fundraising becomes more attractive. “For companies that need funds for expansion, they are likely to stay public versus going private,” he said.

Martin Siah, head of global corporate and investment banking in South-east Asia at Bank of America, also does not see the rule change as a major factor.

“We do not believe that such an amendment will materially alter the economic rationale of making a decision to privatise – this is typically driven by factors such as public valuation relative to potential intrinsic value, public markets’ perception of the stock as well as the financial capability of the acquirer,” he said.

The current uncertain macroeconomic conditions as well as geopolitical tensions have also contributed to a conservative mindset among potential acquirers, he added.

“We believe once there is a more prolonged period of stability in macroeconomic conditions, there will be significant mergers and acquisitions (M&A) activity from buyers who are waiting on the fence,” Siah said.

If offers do arise in the months before the amendments are passed, Securities Investors Association (Singapore) founder David Gerald said minority shareholders should consider privatisation offers carefully to see if they are worth accepting.

“Foremost in their minds should be, why is the company rushing to make the offer before the amendments are in place,” he said, adding that good offers should still merit a “yes” vote.

Meanwhile, Singapore Exchange Regulation (SGX RegCo) cautioned companies against rushing ahead with offers that make use of the so-called “special-purpose vehicle” loophole.

“Where companies nonetheless choose to proceed, SGX RegCo will work with Securities Investors Association (Singapore) to make clear to minority shareholders the impending changes to the Companies Act so that investors can act and/or vote accordingly,” a spokesperson said.

A significant number of SGX-listed companies are trading below their book values, making them attractive privatisation candidates. According to Bloomberg data, there were 332 counters trading below their book values as of market close on Thursday (Feb 23). Of these, 226 counters have a free float percentage of less than 50 per cent.

Section 215 of the Companies Act allows an offeror to compulsorily acquire all the shares of a target company once it obtains at least 90 per cent of shares that it and its related companies do not already own.

Controlling shareholders have manoeuvred around this rule by setting up special purpose vehicles to make privatisation offers so that they can have their shares count towards the 90 per cent acceptance threshold.

The proposed amendments will exclude certain shareholders’ shares from the computation of the 90 per cent threshold, such as any entities controlled by the individual behind the offer.

*Amendment note: The article had earlier said that the Monetary Authority of Singapore intends to amend the Companies Act. Instead, it should have been the Ministry of Finance.