Chip Eng Seng IFA’s ‘fair and reasonable’ finding needs to consider factors that matter most

WHEN Chip Eng Seng Corporation (CES) last month issued a circular in relation to the privatisation offer from its major shareholders, it was interesting to note the independent financial adviser’s (IFA) opinion on the deal.

The offer of S$0.75 per share represented a steep 43.9 per cent discount to CES’s revalued net asset value (RNAV) per share.

But the IFA, Xandar Capital, deemed the offer to be “fair and reasonable” – and recommended shareholders accept it.

In the circular, the IFA spelled out its rationale for the opinion.

Xandar Capital said it had considered various factors; eight of these had weighed in favour of the offer’s “fairness”, compared to only three to the contrary.

In an unusual move, the Singapore Exchange (SGX) directed a set of queries to the IFA after the circular was published.

Among these was a request for elaboration – with “specific details” – on how the IFA came to its view.

In defending its opinion, Xandar Capital noted that the “against” factors did not outweigh the “for” factors, despite the discount to RNAV.

The IFA is rightfully entitled to its view, of course.

But shareholders would likely prefer it – and indeed, be better served – if the most material factors are given heavier weightage when it comes to determining the fairness of an offer.

Fair and reasonable

Under the Singapore Code on Take-overs and Mergers, an IFA has to conclude in its advice whether an offer is “fair and reasonable”.

The term “fair” relates to the value of the offer price or consideration against the value of the securities. An offer is deemed to be “fair” if the offer price is greater or equal to the securities’ value.

Meanwhile, the term “reasonable” requires the IFA to consider other matters as well as the value of the securities. Some of these matters include the existing voting rights in the offeree company held by the offeror and its concert parties, as well as the market liquidity of the securities.

Among the eight factors that Xandar Capital considered include the historical trading price of the shares, and the earning multiples of comparable listed companies.

Xandar reported the price-to-net asset value (NAV) ratio of the offer was higher than that of comparable listed companies, while the price-to-RNAV ratio was higher than the range of property takeover transactions.

There were, however, three factors that counted against the fairness of the final offer consideration.

Xandar Capital said the price-to-RNAV ratio was lower than the average ratio of non-privatisation transactions.

It also noted that “the valuation ratios implied by the final offer consideration are lower than the mean corresponding ratios of the privatisation transactions as well as the property privatisation transactions”, but did not specify what those valuation ratios were.

More transparency about those valuation ratios would have been preferable. It would also have been helpful if they had separated the privatisation transactions from the property privatisation transactions – as was the case in the factors “for” the offer.

Besides providing greater clarity to shareholders, those details would address concerns about whether the methodologies used to count factors “for” were consistently applied to the factors “against” the fairness of the offer.

Materiality of factors

Beyond counting the number of factors, the IFA’s assessment should also consider the materiality of each metric.

After all, some indicators deserve greater emphasis than others.

My colleague, Leslie Yee – who is a shareholder in Chip Eng Seng – said in a column last month that he intends to reject the offer because the price is too low. He noted at the time that the offer price was a discount of 24 per cent to NAV per share of S$0.9906 as at end-June 2022.

For a property player such as CES, which has most of its material assets mainly related to property, NAV and RNAV should be the key considerations for shareholders.

The IFA also acknowledged the importance of this metric in the report, calling the company’s P/RNAV ratio “the more appropriate statistics for property development companies”.

In this regard, the offer looks less attractive.

The CES offer implies a price-to-RNAV ratio of 0.56. In comparison, the mean and median comparable ratios in the privatisation of property development companies stood at 0.63 and 0.67, respectively.

Only the transaction involving Top Global had a lower price-to-RNAV ratio than the CES offer.

The IFA noted that the price-to-RNAV was still higher than that in previous property takeover transactions. However, this was in reference to non-privatisation transactions.

As the offer for Chip Eng Seng is being carried out with the intent to privatise the company, shareholders would surely be most interested in how the deal compares to other successful privatisation deals.

And it may be more useful for greater emphasis to be placed on such past precedents.

Past precedents

While Xandar Capital noted that the price-to-RNAV of the CES offer was “within the range” of property privatisation transactions, it didn’t mention that all of the previous voluntary general offers cited were deemed “not fair” by their respective IFAs.

The deals for Roxy-Pacific Holdings, SingHaiyi Group, Fragrance Group and Top Global were all deemed to be “not fair, but reasonable”, even though their IFAs still recommended that shareholders accept the offers.

Meanwhile, the voluntary general offer for GYP Properties was deemed “not fair and not reasonable”, with the recommendation to reject the offer.

The only previous comparable case cited that got a “fair and reasonable” opinion was World Class Global’s scheme of arrangement.

It isn’t apparent why greater emphasis was not placed on these past precedents.

Another question is whether other metrics, such as comparing the offer to the trading valuations of currently-listed comparable companies, are a reasonable benchmark for fairness.

Many SGX property counters trade at sizable discounts to their NAVs. Past privatisation offers – even at a premium to the last traded price and volume-weighted average price (VWAP) – have been deemed “not fair”, due to the poor price-to-RNAV ratio.

It is also worth noting that the premium of CES’s final offer over the last transacted price, one-month and three-month VWAP were lower than the corresponding mean and median premiums of the other property privatisation transactions cited by the IFA.

While a simple count may suggest that the “for” factors outweigh the “against” factors in determining the fairness of the CES deal, shareholders may wish to pay closer attention to the materiality of the factors used in the assessment – and decide on the merits of the offer – before tendering their shares.