Crunch time for Great Eastern’s minorities

MINORITY shareholders of Great Eastern have some tough decisions to make in the days and weeks ahead.

After the market closed on Friday (Jun 14), OCBC said its offer price of S$25.60 per share for Great Eastern is final, and that the closing date for the offer had been extended to Jul 12.

The bank also said it had received acceptances for more than 1.74 million Great Eastern shares as at Jun 13. This raised its stake in the insurer to more than 89 per cent (including shares held by its concert parties).

OCBC now only needs to acquire slightly more than 4.7 million Great Eastern shares to push its stake in the insurer past the 90 per cent threshold – at which point trading in Great Eastern shares may be suspended.

On the same evening, however, Great Eastern revealed in a circular that its independent financial adviser (IFA) had found OCBC’s offer to be “not fair but reasonable”. This means the insurer is unlikely to be allowed to delist in conjunction with the current offer, even if it loses its public float and trading in its shares is suspended.

The Singapore Exchange Regulation (SGX RegCo) requires companies seeking to delist to provide their shareholders with an exit offer that is both fair and reasonable; and its handling of a precedent case holds out the possibility of Great Eastern’s minorities eventually getting a better deal.

Boustead Projects was hit with a trading suspension last year after an offer from Boustead Singapore left it in breach of the minimum required public float. The IFA appointed by Boustead Projects had deemed the final offer at S$0.95 per share to be “not fair but reasonable”.

At the direction of SGX RegCo, Boustead Singapore subsequently made an exit offer for Boustead Projects at S$1.18 per share.

What will all this mean for Great Eastern’s share price this week?

The way I see it, investors who were betting on an upward revision of OCBC’s offer price might be inclined to run for the exit. This is likely to drive Great Eastern’s share price down towards the offer price level of S$25.60.

Great Eastern closed Friday at S$26.10.

Investors with a longer-term horizon, however, may be emboldened by the IFA’s “not fair but reasonable” prognosis, and the prospect of a higher delisting exit offer down the road.

The IFA put the “range of values” for Great Eastern at between S$28.87 and S$36.19 per share. This suggests an exit offer of at least S$28.87 per share – nearly 12.8 per cent more than OCBC’s final offer price – may be considered fair and reasonable.

Finally, some key minority shareholders of Great Eastern may well choose to remain invested even if the insurer is delisted, on the view that OCBC’s offer price and the IFA’s range of values are just too low to warrant serious consideration.

For this group of investors, the next few weeks could be their last opportunity to purchase Great Eastern shares at a big discount to the insurer’s embedded value (EV).

Basis of valuation

This column previously said IFAs appointed to evaluate take-private deals often do not place sufficient weight on how the basis of valuation for a public-listed company may change once it goes private.

Many companies own assets with private-market valuations that are plainly visible, and investors often choose to own shares in such companies in anticipation of this value eventually being unlocked.

Yet, IFAs tend to focus on comparing the valuations implied by the offer price to the public-market valuations of similar companies; and the valuations garnered by public-listed companies in past take-private deals.

EY, the IFA appointed by Great Eastern’s board, hewed to this practice.

For instance, it said the price-to-net asset value (P/NAV) ratio implied by the offer for Great Eastern of 1.5 times is above the median and average P/NAVs of precedent take-private transactions going back to 2021.

Among these precedent deals were the privatisations of Challenger Technologies, Chip Eng Seng Corporation, Golden Energy and Resources, and Dutech Holdings.

The IFA also said the price-to-EV (P/EV) ratio implied by the offer for Great Eastern of 0.7 times is in line with the average and mean P/EV ratios of comparable companies.

Among these comparable companies are AIA, Manulife Financial Corp, Prudential, Bangkok Life Assurance and Allianz Malaysia.

The IFA also derived the lower bound of its range of values for Great Eastern by applying the average P/EV ratio garnered by comparable companies over the past 10 years of 0.8 times to the insurer’s end-2023 EV adjusted for dividends.

The upper bound of the range was set at Great Eastern’s end-2023 EV adjusted for dividends.

Tough decision

In my view, it would have been more appropriate for Great Eastern’s end-2023 EV adjusted for dividends to form the lower bound of the IFA’s range of values for the insurer, rather than the upper bound.

An insurer’s EV is the present value of the profits it expects to generate from its in-force business plus its adjusted NAV. In theory, it is the value of an insurer assuming it does not write any further policies.

To my mind, this would be the minimum valuation at which longtime partners in a privately held insurance business would expect to buy one another out.

In the weeks ahead, Great Eastern’s minority shareholders will have to decide how committed they are to remaining invested in the insurer.

Given the precedent set by the Boustead Projects case, my guess is that many will not tender their shares even if OCBC crosses the 90 per cent threshold.

After waiting for years to earn a decent return from their Great Eastern shares, many minority investors may well be prepared to endure a lengthy trading suspension for an exit offer that could be significantly higher than the current offer price.

The writer owns shares in Great Eastern and OCBC

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