Strategic reviews not necessarily a panacea for struggling listcos, observers say

LONG-SUFFERING shareholders of Seatrium and Singapore Post (SingPost) may have gotten a reprieve when the companies announced that they were commencing reviews of their businesses in May and July this year. But market watchers said such reviews do not always guarantee better returns for shareholders. 

Financial advisers polled by The Business Times (BT) said the key catalyst for companies commencing strategic reviews is to unlock value for shareholders. 

Jerry Chua, chief executive of Evolve Capital Advisory, noted that there could be several reasons for companies to kickstart this process.

One could be a stock trading below its market value or at a significant discount to its net asset value, he said. Another could be a company having operations in certain “unattractive” growth areas or wanting a shift in strategic initiatives and market focus. 

Kelvin Tan, executive director for strategic advisory at DBS, said that while companies may choose to conduct a strategic review for several reasons, the process is usually triggered to address an underperforming share price or to narrow the gap between the firm’s share price and intrinsic value. 

“The role of a financial adviser or investment banker is to first help the company identify possible underlying causes for this gap, and to work with management and the board to explore various corporate finance solutions as a means of unlocking shareholder value,” Tan said. 

A financial adviser then steps in to evaluate the current situation of the company, and help it identify opportunities for growth. Some ways a company can do this is through the divestment or spin-off of business units, privatisations or mergers and acquisitions. 

“Certain options could be adapted in the short-mid-term tenure, while some could have a longer gestation period resulting in a mid to long-term tenure to achieve the objectives of unlocking shareholder value,” said Evolve’s Chua. 

But shareholders of companies that have announced strategic reviews might find themselves having to wait for a long time before getting attractive returns. 

Ooi Chee Keong, partner for audit and assurance at Mazars Singapore, said there is no “one-size-fits-all” timeline for such reviews. 

“It’s shaped by the complexity of the business, the scope of review, data availability, market trends, and internal decision-making speed,” he said, adding that these reviews are “a multi-faceted process” for companies. 

Tan Wei Cheong, financial advisory executive director at Deloitte Singapore, said some factors that might affect the duration of the review include the size of the company, the industry it operates in, as well as the number of types of businesses, which could increase the complexity of the review. 

Data compiled by BT showed that eight companies have announced strategic reviews over the past two years. Their total returns to shareholders since the reviews were announced, however, varied greatly. 

At one end of the spectrum is Keppel Corporation, which has posted a 191.5 per cent return to shareholders since the announcement. On the other hand, Manulife US Reit has a total return of -73.5 per cent. 

How a company fares following the commencement of strategic reviews may depend on the corporate actions it has planned and the details it gives its investors about the review, said corporate governance advocate and professor of accounting at the NUS Business School Mak Yuen Teen. 

As far as Keppel and Manulife US Reit are concerned, he said these two issuers were “in very different situations”. 

“When Manulife announced the appointment of a financial advisor for its strategic review, it was very light on the purpose of the review, merely saying that it was to enhance unitholder value,” said Mak. Since the announcement, the Reit has been facing serious issues, with declining valuations of its properties, actual and potential breaches of debt covenants, falling unit price, and very negative analysts’ sentiment, he noted. 

Meanwhile, Keppel’s strategic review was to support the implementation of its Vision 2030 roadmap, and to explore options to increase long-term shareholder value and to support its transition from brown to green. 

“It is not as simple as whether there is a strategic review, but it is also about the situation the company is in and the market’s assessment of its ability to implement the recommendations from the review,” said Mak. 

Similar to Keppel, Singapore Press Holdings spun off its media unit that was weighing on its profitability, and attracted a bidding war for its seemingly attractive non-media businesses. 

Another case in point is Singtel, which has delivered returns of 11.6 per cent to shareholders since announcing a review of its subsidiaries in May 2021. 

In some cases, Mak said strategic reviews are done merely to support or confirm what the management or board have already decided to do. “Those doing the reviews may have vested interests in certain options, so they may not add much value at all,” he added. 

Mazars’ Ooi said the outcomes of recent strategic reviews by Singapore-listed companies show the “complex interplay of factors that can lead to either weaker or improved returns”.

He said that, among other things, the proper execution of new strategies can help financial performance, while external market conditions such as economic trends and industry shifts can impact outcomes.

Deloitte’s Tan said other factors that could swing the success of a review include a strategy based on wrong assumptions or forecasts, the failure to adjust a strategy when conditions change, as well as plans that are “too complex to be effectively communicated”. 

Sriram Changali, Asean value creation leader at EY-Parthenon, said companies should undertake “holistic strategic reviews” that cover all aspects of transformation. This includes factors such as strategy and portfolio optimisation, financial restructuring, and environmental, social and governance considerations.

He noted that companies which proactively undertake transformation even when they are already outperforming the industry typically see a 13 per cent outperformance on total shareholder returns following the transformation period, compared to reactive peers.

Kennedys Legal Solutions partner Robson Lee said better growth and profitability following a strategic review and major changes to the company’s businesses is not a given.

He stressed that the boards of companies that have undertaken structural and major operational changes following strategic reviews must have “the gumption to see through the decision” to revamp the company’s business, irrespective of short term disruptions that could affect the profitability of the group and shareholders’ returns.

The board should also be able to accept “consequential disruptions” such as lower profitability, weaker returns, as well as paltry or no dividend pay-outs in the transitionary period. 

“At the end of the day, directors must make the commercial judgement and be fully accountable to shareholders for the decision to make a major revamp to the existing business structure and operations of the company,” Lee said.