What’s behind CDL’s half-hearted offer to buy back a tenth of its preference shares?

REDEMPTION has finally come for the long-suffering holders of City Developments Ltd (CDL) preference shares. Just not the kind they were hoping for when they subscribed for these pref shares nearly 20 years ago.

Early this month, the mainboard-listed property developer announced that it will buy back up to 33.1 million pref shares, or about 10 per cent of its entire 330.9 million pref shares under a share purchase mandate approved by shareholders in April. Each shareholder is entitled to sell 10 per cent of his holdings under an equal access scheme.

In its offer document, CDL said that this off-market offer – at S$0.78 a share – will allow the company to exercise greater control over its share capital structure. It also noted that the trading volume of these shares has been generally low, with an average daily trading volume of some 18,833 shares, 15,206 shares, 45,912 shares and 29,606 shares during the past one-month, three-month, six-month and 12-month periods respectively.

In the light of such illiquidity, this offer “will provide preference shareholders with a cash exit opportunity to tender their preference shares for acceptance by the company and monetise such preference shares”, CDL noted.

Most minority shareholders are unlikely to be impressed by the logic or price of this offer. These pref shares are a pot of gold, but only CDL can conjure the rainbow that leads to it. To understand why investors would be keen to hang on to their pref shares, one would have to go back 20 years.

In February 2004, CDL announced a major corporate exercise that involved a special cash dividend, an issue of bonus warrants and a renounceable rights issue of pref shares. Shareholders were given the right to buy two pref shares for every five ordinary shares they held at S$1 each. The pref shares will pay net dividends of not more than 3.9 per cent a year. They may be converted to ordinary shares at the company’s discretion. On conversion, a shareholder would get 0.136 CDL ordinary share for every pref share. On top of that, the company will pay shareholders 64 cents as special dividend for each pref share upon conversion.

Mathematically, this is how it works: For every 1,000 pref shares, the investor will get 136 CDL ordinary shares, plus a special cash payout of S$640. Based on the closing share price of S$6.39 on Wednesday (Nov 15), these shares are valued at S$869. As an illustration, if these shares were to be converted on Nov 15, each share will yield S$1.509. This is more than 50 per cent higher than the pref share’s closing price of S$0.975 on Nov 15, and almost double that of the off-market offer price of S$0.78.

Lowball offer

Now here’s the rub: CDL wants only 10 per cent of your pref shares, and will pay you 20 per cent less than market. That’s not even factoring the potential of a pref share conversion to ordinary shares, which admittedly may never happen since the company - not shareholders - is the only party entitled to exercise the right of conversion.

If there is any doubt at all, the company has made it clear that it is not going to happen any time soon. In the offer document, it said: “CDL does not have any current intention to exercise its right to convert the preference shares to ordinary shares.”

Unless you hold a substantial number of pref shares and need to free up some cash, this buyback offer is not for you. Best to hang on to your shares and earn in perpetuity (as long as there is no conversion) a fixed annual sum of 3.9 cents a share, which the company has never failed to pay. 

Return wise, the pref shares yield 4 per cent based on the current market price of S$0.975 and 5 per cent based on the S$0.78 offer price. In comparison, the average dividend yield of CDL ordinary shares is 1.312 per cent per annum for the past five years. 

What does one make of the half-hearted offer? Yes, the rationale is in the offer document. But it is very much a cookie-cutter statement that can be found in numerous share buyback or exit offer documents. 

Beyond the stated reasons, could it also be a case of assuaging disgruntled investors who are holding a large number of pref shares? When the renounceable rights issue was launched in 2004, it was stated that CDL may exercise the right to convert the pref shares at any time from the second anniversary of the issuance. Some institutional investors might have bought or subscribed for the pref shares in the belief that conversion would happen, if not sooner, then later. Today we know for a fact that no conversion will take place even after 20 years, so it can’t be pleasing to some investors who may need to exit after a predetermined investment time horizon. 

Possible mandatory offer 

In the foreseeable future, a conversion is unlikely for two reasons:

First, CDL would have to cough up about S$212 million to convert the shares (330.9m x S$0.64). Although the property behemoth will have no difficulty setting aside this sum, the cash could be put to more productive use. For example, just this week, CDL said it had acquired a private rental housing project in Manchester for £75.6 million. 

Second – which is really the crux of the issue – the conversion of 330.9 million pref shares will result in the creation of 45 million ordinary shares, amounting to 4.7 per cent of the enlarged share capital. Of this, half – and that’s a conservative estimate – is held by the Hong Leong group.  

Under Singapore’s takeover code, a mandatory general offer is triggered in the event that any party who, together with others acting in concert, holding not less than 30 per cent but not more than 50 per cent of the voting rights, acquires in any six-month period additional shares of more than 1 per cent.

According to the FY2022 annual report, the group’s stake in CDL stands at 48.6 per cent. A pref share conversion will surely tip Hong Leong’s stake past the 1 per cent incremental threshold.

No doubt the Kwek families that control Hong Leong are extremely wealthy. But mounting a general offer for CDL, which has a market capitalisation of S$5.8 billion, would entail taking out bridging loans and such to finance it, at a time when interest rates are elevated. Not to mention a waste of time and money.

The bottom line is, CDL’s off-market equal access offer is a non-starter for the mom-and-pop investors, unless they hold few shares and want a clean exit. It will be interesting, though, to see if any of the big boys – Hong Leong included – will bite. The offer is open for acceptance until 5.30 pm on Nov 23.