Dissident minority investor calls on OCBC to unlock value by distributing Great Eastern stake

FORMER remisier Ong Chin Woo, who fought to unlock value for minority shareholders of Great Eastern earlier this year, has begun the next stage of his campaign.

In a letter dated Nov 15, Ong asked the board of OCBC to consider distributing all the Great Eastern shares the banking group holds.

By his reckoning, OCBC shareholders could receive approximately 98 Great Eastern shares for every 1,000 OCBC shares they own. Based on Great Eastern’s last traded price, this proposed distribution would be worth just over S$2.50 per OCBC share.

“Distributing Great Eastern shares could unlock substantial value for OCBC shareholders by offering additional returns in the form of a special dividend,” Ong said, in the letter.

He added that OCBC would also reduce its exposure to the risks and volatility of the insurance sector, and be able to concentrate on its core banking operations.

Ong further asserted that distributing Great Eastern shares might improve OCBC’s return on equity, without affecting its capital adequacy ratios too much.

Ong is now canvassing support among shareholders of OCBC. “I believe this proposal represents a rare opportunity for OCBC to reward its loyal shareholders while strengthening its operational focus,” he said, in a letter to some OCBC shareholders, dated Nov 24.

“For this proposal to gain traction, it is critical that the voices of shareholders are heard,” he added.

Ong told me last week that he is hoping to garner sufficient support to table his proposal at OCBC’s next annual general meeting (AGM).

Under the Companies Act, a group of shareholders can requisition resolutions at AGMs if they hold 5 per cent or more of the company’s shares; or comprise not fewer than 100 shareholders, holding shares on which there is an average paid-up sum, per shareholder, of at least S$500.

Stiff resistance likely

Ong is likely to face stiff resistance from OCBC’s board and management.

Responding to questions last week about Ong’s proposal, an OCBC spokesperson reiterated the banking group’s long-held position that having Great Eastern in its fold is integral to its overall strategy.

“We believe that OCBC shareholders are supportive of OCBC’s corporate strategy, built on OCBC’s business pillars of banking, wealth management and insurance,” the spokesperson said.

The bank also sees a synergistic relationship between itself and its insurance arm.

“Great Eastern has significantly contributed to OCBC’s performance and is a strategic pillar of OCBC’s wealth management business, while OCBC has provided Great Eastern access to our extensive retail and commercial customer base,” the spokesperson said, adding that the insurance unit has contributed about 15 per cent of OCBC’s net profit over the past 10 years.

The OCBC spokesperson went on to say: “Any future actions that we undertake will continue to be guided by the interests of OCBC and our shareholders.”

Sensible next move

The idea of OCBC distributing its Great Eastern stake to its own shareholders is not new. It was one of a number of possibilities bandied about earlier this year to resolve the poor trading liquidity and deep undervaluation of Great Eastern’s tightly owned shares.

In the end, OCBC chose a seemingly more straightforward solution. On May 10, OCBC offered to buy the 11.56 per cent of Great Eastern it didn’t already own for S$25.60 per share.

This offer did not satisfy the two key conditions to effect a delisting of Great Eastern, though. It was not deemed by an independent financial adviser (IFA) to be “fair and reasonable”, and the offeror did not obtain at least 75 per cent of the shares held by independent shareholders.

The offer did, however, result in Great Eastern breaching the minimum free float requirement, and its shares being suspended from trading. The Singapore Exchange has given Great Eastern until Jan 24 to explore options to remedy the situation.

OCBC said last month that it now holds 93.72 per cent of Great Eastern’s shares.

The way I see it, OCBC is unlikely to be willing to pay a high enough price to dislodge Great Eastern’s remaining minority shareholders. After all, OCBC did not revise its offer price earlier this year, even after Great Eastern’s IFA said the deal was not fair but reasonable.

On the other hand, if Great Eastern tries to restore its free float by issuing new shares to investors, it may have to price those new shares well below the S$25.60 that OCBC has just paid to increase its stake in the insurer.

Given where things stand now, it may make more sense for OCBC to distribute its stake in Great Eastern to its own shareholders.

While OCBC will become a slightly smaller group, investors may find it easier to track its performance, and its shares may ultimately garner a richer market valuation.

There is also no reason OCBC could not maintain close bancassurance ties with Great Eastern after becoming separate entities.

Furthermore, assuming appropriate share-based compensation schemes for its board and top management are put in place, Great Eastern’s larger free float may help it garner a broader investor following and a healthy market valuation.

Promoting market discipline

The big question is whether Ong will succeed in tabling his proposal at OCBC’s next AGM.

In March, a group of Great Eastern shareholders led by him attempted to put forward three resolutions at the insurer’s AGM to address its weak share price.

The resolutions were for Great Eastern to withhold a portion of its directors’ fees until the market valuation of its shares improved; to reward its management with Great Eastern shares instead of OCBC shares; and to appoint an IFA to explore ways to enhance shareholder value.

Great Eastern said in response that the shareholders’ request did not satisfy all the requirements for a requisition for resolutions to be moved.

Coincidentally, Singapore Exchange Regulation (SGX RegCo) kicked off a public consultation in April on proposed new rules that will require companies to assist shareholders who requisition a general meeting.

SGX RegCo wants companies to commence efforts to facilitate the meeting within 21 days of a requisition notice. Companies that dispute the validity of the requisition notice will be required to apply for a court ruling within 21 days.

These proposed rules specifically address difficulties shareholders face in requisitioning extraordinary general meetings (EGMs), rather than tabling resolutions at AGMs.

SGX RegCo chief executive Tan Boon Gin said in Episode 43 of the Mark To Market podcast that shareholders tabling resolutions at AGMs also represent a form of market discipline, which the frontline market regulator wants to encourage.

He said SGX RegCo may extend the approach it is taking with shareholder-requisitioned EGMs to shareholders tabling resolutions at AGMs in the future, but pointed out that AGMs have several matters on their agendas and they need to be held by a certain time.

“So it may not be as practical to require companies to go to court to get a ruling, because of the time constraints and impact on other shareholders,” he said.

On the other hand, a company’s board cannot easily dodge disgruntled shareholders at an AGM. Even if the company declines to table resolutions put forward by certain shareholders, those shareholders can attend the AGM to press their case, Tan noted.

“That was what happened at Great Eastern. The board had to address the shareholders’ concerns.”

One way or another, OCBC’s board may soon have to address the idea of distributing the group’s stake in its insurance arm.

The writer owns shares in OCBC and Great Eastern.