Lessons from the voluntary cash offer for TTJ

THE lowball privatisation offer for construction engineering company TTJ Holdings was declared unconditional earlier this month, as the level of acceptances pushed the offeror’s stake past the 90 per cent threshold.

It was clear to investors from the outset that the offer price of S$0.23 per share was not only inadequate, but that TTJ’s executive chairman Teo Hock Chwee was exploiting a loophole in the law which would enable him to more easily reach the compulsory acquisition threshold.

The Companies Act allows an offeror to exercise the right of compulsory acquisition once it obtains 90 per cent of a target company’s shares that it and its related companies do not already own.

But Teo made the offer through a special-purpose vehicle called THC Venture, which allowed his 84.4 per cent stake in TTJ to count towards the 90 per cent acceptance threshold.

So, THC Venture only needed to obtain a further 5.6 per cent of TTJ’s shares before forcing holders of the remaining 10 per cent to give in.

One TTJ shareholder grumbled in a letter to The Business Times that the structure of the offer effectively circumvented the requirement for exit offers to be fair and reasonable.

Another TTJ shareholder said in a separate letter that the Securities Industry Council, which administers Singapore’s takeover code, ought to intervene.

In response, the Accounting and Corporate Regulatory Authority (Acra) said it has reviewed several areas of the Companies Act, and will be proposing amendments to address the concerns raised about the compulsory acquisition framework.

That is cold comfort to many minority shareholders of TTJ – who will now have to part with their shares at S$0.23 each, versus the company’s book value as at Jan 31 of S$0.37 per share.

This episode may well leave some of them feeling that Singapore’s market regulators prioritise form over substance.

If it is clear to everyone that a certain market practice violates the spirit of the law – and, indeed, is commonly referred to as a “loophole” – surely market regulators ought to immediately stop it.

Role of IDs

Another aspect of the TTJ offer worth examining is the role played by its independent directors (IDs) – namely, Leong Yee Yew, Lim Yian Poh and Ling Chien Yien.

Together with executive director Chiong Su Been, they recommended that minority shareholders of TTJ reject the offer.

This was based on the advice of their appointed independent financial adviser (IFA) Zico Capital, which said the offer was neither fair nor reasonable.

Zico Capital had considered the offer from a variety of angles, including the one that was on the minds of investors – that the offer price was well short of TTJ’s net asset value (NAV) as at Jan 31.

The IFA said after making adjustments for the sale of certain assets in Malaysia, completed after Jan 31, and marking TTJ’s real estate assets to their “market value”, the company’s NAV would notionally be S$0.46 per share.

A major part of this adjustment related to TTJ’s real-estate asset at 57 Pioneer Road. Zico Capital ascribed a value of S$36 million to it, based on an estimate by Knight Frank – which was 2.9 times the property’s carrying value as at Jan 31 of S$12.4 million.

The IFA ultimately put the estimated value of TTJ shares at between S$0.37 and S$0.46 – or, as much as twice the offer price.

This column said last month that the pro-minority investor stance taken by TTJ’s recommending directors and their IFA was remarkable.

IDs generally have little to gain personally by opposing a company’s controlling shareholder. Moreover, the perceived independence of IDs tends to wane, the longer they serve on any particular board.

All three of TTJ’s IDs have served for more than nine years, and had been re-elected following two-tier shareholder votes.

The lesson here is perhaps that the actions of IDs ought to count for something in determining their supposed independence. If factors like the amount of time they have served on a board matter, so should their track record in acting in the best interests of investors.

Value unlocking

In the end, the recommendation of TTJ’s IDs did not stop the lowball offer from succeeding.

While TTJ’s share price briefly spiked above the offer price to close at as high as S$0.25 on Jun 27, it soon fell back down. This was due in large part to the offeror stating on Jun 29 that it would not increase the offer price.

On Jul 7 – just a day before the original close of the offer – the offeror had secured 88.72 per cent of TTJ’s shares. The offer period was extended till Jul 22.

The following day, on Jul 8, the offeror managed to secure 90.26 per cent of TTJ’s shares.

While the compulsory acquisition loophole certainly contributed to minority shareholders not being adequately compensated for their shares, another important factor was the lack of action by the company over the years to address the undervaluation of its shares.

The offer price was 37.5 per cent less than TTJ’s book value per share, but it was 36.1 per cent above the stock’s last traded price before the offer announcement; and 12.2 per cent higher than the stock’s highest traded price during the preceding 2 years.

TTJ’s board should have considered options to unlock value for all its shareholders. For instance, it could have tried to crystallise the value of its key property at 57 Pioneer Road. The board could also have considered distributing some of the cash on its books – which amounted to S$29.2 million as at Jan 31.

Questions should have been asked about the size of Teo’s stake in the company – which increased significantly in 2015 – and the extent to which that might have been contributing to the illiquidity and undervaluation of its shares.

While the privatisation of TTJ will enable minority shareholders to cash out at a premium to market value, many of them would probably have preferred it if Teo and TTJ’s board had worked to unlock the immense underlying value of the shares over time.