When investors sell businesses on the cheap

INVESTORS are not supposed to sell businesses for free. That happens when they sell their shares for only the net cash on the company's balance sheet, or less.

They effectively get back the money sitting in the bank that was due to them anyway.

But they give up the potential of invested capital. By selling at net cash, they are ascribing a value of zero to hard assets like inventories and receivables, and soft assets like technical know-how and client relationships. All these are ingredients for future profits.

This sad state of affairs arises for Singapore Exchange-listed firms when long-suffering shareholders just want their money back after years of illiquidity, precious few dividends and dismal share prices.

So it goes for copper foil maker Kingboard Copper Foil Holdings, whose offer closed early this month with the offeror controlling shares and valid acceptances amounting to 82.37 per cent of the firm, versus the 66 per cent it started out with.

Kingboard had languished at below its net cash value for the longest time, as pointed out in a previous column ("Cheap cash-rich companies on SGX: Opportunity or trap?", May 16, 2016).

At that time, Kingboard was trading at 27 cents a share, already up from lows of under 20 cents a year ago. Yet it was only after its parent tried to privatise it in March for just 40 cents - around its latest net cash level - that the company traded up.

It dropped below 40 cents again after the offer closed with less than the amount of acceptances needed to delist the firm. And it continues to trade below its 1999 initial public offering (IPO) price of 53 cents.

Today, the firm is increasingly cash-rich once depreciation is added back. In 2016, another HK$143 million (S$25.6 million) of cash flowed to its coffers. For the first three months of the year, profit more than doubled while revenue grew by double digits.

We don't have space here to go into the gory details of its shareholder revolt that led to the current state of affairs.

Suffice to say, now that its latest privatisation bid is over, Kingboard is closer to a point where it can squeeze out minorities and privatise the company for cheap.

Many minorities have thrown in the towel, despite the independent financial adviser and independent directors of the firm recommending shareholders to reject the deal.

It is a shame that Kingboard's parent can get away with buying stakes at 40 cents. Re-initiating a dividend, for example, would attract shareholders back to the company and increase its value.

As it stands, the only entity that will benefit is the Hong Kong-listed parent itself, Kingboard Laminates.

Bad deal

Another example of an unfairly cheap takeout offer is Nobel Design Holdings, an interior designer, furniture retailer, and property developer listed since 1996.

It is less clear here if management is deliberately cutting a terrible deal with minorities.

The current mandatory offer has its origins in a board tussle a few years ago between Nobel founder Bert Choong and his successors.

Nobel currently has net cash per share of almost 56 cents, and net asset value of 74 cents. But Mr Choong was happy to sell his stake of over 50 million shares for just 51 cents (see amendment note) a share to other substantial shareholders of the firm.

That 23 per cent of the firm changed hands triggered the current mandatory offer.

Asked by The Business Times why he wanted to sell, Mr Choong would only say that the time was right to monetise his stake.

For minorities, the deal is clearly a bad one. Not only are they getting less than what the company has in the bank, they are also giving up on Nobel's growing furniture distribution business in the US.

Hopefully, with the founder now completely out of the picture, the management can have more flexibility to decide how to best increase value for shareholders.

Based on Bloomberg data, shareholder returns have been underwhelming. Even with dividends re-invested, the company has returned just 1.4 per cent a year from its listing in 1996 to mid-May this year.

If Nobel wants its valuation to improve, it needs to decide what it wants to be.

Does it want to be a developer or an interiors firm? These are two very different businesses that might receive higher valuations if apart.

Nobel once said that its cash needed to be conserved for its property business. As of end-March, it has some S$145 million in cash, or S$122 million after short-term debt.

That is a lot of money that can be put to good use, or otherwise returned to shareholders.

As investor Mano Sabnani told BT: "I hope minorities will stay in. You can always go to meetings and try to persuade them to adopt a fairer policy."

There is value yet in Nobel, and Kingboard also looks interesting.

Shareholders shouldn't sell out on the cheap.

Amendment note: Mr Choong of Nobel Design sold his stake for 51 cents a share, not 52 cents.