Golden Energy’s delisting: IFA opinion is faulty

GOLDEN Energy and Resources (Gear) is scheduled to put its controversial delisting proposal to a shareholder vote on Jun 9.

But the opinion of the appointed independent financial adviser (IFA) that the deal is “fair and reasonable” is faulty. For one thing, the IFA has valued Gear’s stake in its Indonesia-listed thermal coal arm inappropriately in its sum-of-the-parts (SOTP) model.

More importantly, the IFA – a firm called W Capital Markets – has not provided any analysis on whether the exit offer for Gear (which takes place after its Indonesian arm has been separated) is fair and reasonable.

Under the deal, Gear has proposed a distribution in-specie of its 62.5 per cent stake in Indonesia-listed Golden Energy Mines (Gems). Shareholders of Gear can choose to receive 1.3936 Gems shares for every Gear share they hold; or a cash consideration of S$0.792 per Gear share – which prices the entitlement of 1.3936 Gems shares at 6,500 rupiah per Gems share.

Gear then proposes to delist itself with an exit offer of S$0.181 per share. The offeror is a Singapore-incorporated company called Duchess Avenue, which is linked to senior members of the Widjaja family.

Gear shareholders who opt to receive Gems shares will receive a total effective consideration of S$0.964 per share (based on the market price of Gems shares of 6,425 rupiah when these terms were announced).

Shareholders of Gear who take the cash option for their Gems shares will pocket a total consideration of S$0.973 per share.

Gear’s IFA considered a range of factors in the process of coming up with its opinion, including Gear’s financial performance, its share price performance, valuation ratios of “comparable companies” and precedent privatisation transactions.

In the end, the IFA said in its letter to Gear’s board that its “estimated market value” of Gear shares is S$0.64. This was derived by benchmarking Gear to the market valuations garnered by a number of “comparable companies” – specifically, the ratio of their enterprise value to their earnings before interest, taxes, depreciation and amortisation.

The IFA also came up with an SOTP valuation range for Gear shares of between S$1.041 and S$1.104 – with a mid-point of S$1.072.

The IFA noted that the range between the “estimated market value” and the mid-point SOTP value was “rather wide”. So, it took the “interquartile range” – that is, the middle 50 per cent of the range – to arrive at its estimated range of values for Gear shares of between S$0.748 and S$0.964.

As the consideration that Gear’s shareholders stand to receive falls at the very top of this range or above it, the IFA declared the deal to be “fair and reasonable”.

Gems’ value downplayed

Here is the problem: The IFA’s SOTP model valued Gear’s 62.5 per cent stake in Gems at between S$0.474 and S$0.537 per Gear share.

This was obtained by ascribing a value of between 3,773 rupiah and 4,277 rupiah to Gems shares – which is less than two-thirds of the value shareholders of Gear actually stand to receive when the stake in Gems is distributed to them as a dividend in-specie.

Gear’s IFA decided that 3,773 rupiah to 4,277 rupiah per share is the appropriate valuation range for Gems, by considering the market valuations garnered by “comparable companies”.

This just seems wrong to me. There is a plainly observable market price for Gems shares – they closed on Friday (May 26) at 6,300 rupiah.

If shareholders of Gear were to be paid 3,773 rupiah to 4,277 rupiah, instead of 6,500 rupiah for their entitlement to Gems shares in connection with the distribution in-specie, many of them would probably not agree to that element of the deal.

The IFA also noted in its letter that an appraiser commissioned by Indonesia-listed Dian Swastatika Sentosa – which holds a 77.5 per cent stake in Gear – had ascribed a value of 6,621 rupiah to Gems shares.

It seems strange to me that parties involved in the deal are ascribing such different values to the same asset.

Gear minus Gems

Besides the 62.5 per cent stake in Gems, Gear’s other key assets are a 64 per cent stake in Australia-listed metallurgical coal producer Stanmore Resources, and a 50 per cent stake in privately-held gold miner Ravenswood Gold Group.

The IFA valued the 64 per cent stake in Stanmore in its SOTP model at S$0.574 per Gear share. This was based on Stanmore’s closing price of A$2.92 on May 8, which was the “last practicable date” before the dissemination of the shareholder circular.

Stanmore closed on Friday at A$2.62.

On the other hand, the Ravenswood stake was valued at its carrying value in Gear’s books as at Dec 31 of US$62.7 million – or S$0.031 per Gear share.

The IFA valued Gear’s various other assets at S$0.033 per share. It also calculated that Gear’s net debt at the company level as at Dec 31 was equivalent to S$0.071 per Gear share.

Adding up the value of these various pieces of the group suggests that the SOTP value of Gear excluding its stake in Gems is S$0.567 per share – which is more than three times the exit offer of S$0.181 per share.

The IFA did not address this gap between the exit offer price of S$0.181 per share and the SOTP value of Gear excluding its stake in Gems.

“Reality check” necessary

Gear has been at pains to present the proposed distribution in-specie of its stake in Gems and subsequent exit offer – which are inter-conditional – as a single transaction. In its recent circular, it urged its shareholders to view and evaluate the consideration they stand to receive in its entirety – and not focus on the exit offer price on a standalone basis.

Earlier this year, however, a shareholder of Gear asked the authorities to clarify whether Gear was breaching Singapore’s rules on delistings and exit offers by telling its IFA to opine on whether the proposed distribution in-specie and subsequent exit offer – when taken together as a single transaction – are fair and reasonable.

The shareholder said the two elements of the deal should not be conflated, and that the IFA ought to provide a view on whether the exit offer itself is fair and reasonable.

Responding to this concern, SGX told Gear in a letter dated Feb 24 that it should ensure its IFA’s opinion states not only whether the two elements of the deal when taken together are fair and reasonable, but also whether the all-cash consideration Gear shareholders stand to receive is fair and reasonable.

SGX also reminded Gear that its IFA should exercise due care, skill and professional judgement in adopting appropriate valuation methodologies, and that its analysis should be supported by reasonable grounds and assumptions that can withstand scrutiny.

On Mar 18, the terms of the deal were sweetened – with minority shareholders of Gear being offered as much as 15 per cent more for their shares. This was seen as a victory of sorts for investors, and sparked a rally in the stock.

The revised terms of the deal still undervalue Gear, though. And, the IFA seems to have determined the deal to be fair and reasonable by ignoring the plainly observable market value of Gear’s stake in Gems.

SGX should take another look at this case, in my view. Specifically, it should ask Gear’s IFA to conduct a “reality check” on its opinion that the whole deal is fair and reasonable by examining if the exit offer of S$0.181 is also fair and reasonable on a standalone basis.

The writer owns shares in Golden Energy and Resources.