Hanwha’s offer for Dyna-Mac shouldn’t be compared to past non-privatisation deals

THERE have been two important developments since Hanwha Ocean SG’s offer for Dyna-Mac was spotlighted by this column three weeks ago.

On Oct 14, the offeror – a special-purpose vehicle controlled by Hanwha Ocean and Hanwha Aerospace – increased the offer price from S$0.60 per share to S$0.67 per share.

The offeror said that this new offer price exceeds all closing prices for Dyna-Mac for the last 10 years, and that there would be no further revisions.

The other important development was that Dyna-Mac’s independent financial adviser (IFA) said on Oct 23 that the revised offer is both fair and reasonable.

Among the factors the IFA said supported the “fairness” of the deal was that the offer price versus the prevailing market price compared favourably to those of precedent non-privatisation transactions in Singapore since 2020.

For instance, the final offer price for Dyna-Mac is 18.6 per cent above its volume weighted average price (VWAP) over the preceding one month, and 27.4 per cent higher than its VWAP over the preceding three months.

The precedent non-privatisation offers were, on average, priced 6.3 per cent below the target companies’ VWAPs over the preceding one and three months.

Why were the precedent non-privatisation offers priced so low? And, why was the offer for Dyna-Mac benchmarked against them?

Hanwha Ocean SG said when it first announced its offer for Dyna-Mac on Sep 11 that it did not intend to “actively pursue” a delisting of the company. Hence, the IFA focused on precedent transactions where the offerors had indicated an intention to maintain the listing status of the target companies.

All but one of these precedent transactions were mandatory general offers (MGOs).

When offers are made for technical reasons rather than because the offeror necessarily wants to enlarge its stake in the target company, offer prices can be quite low – in some instances, they are even set below the target company’s prevailing market price.

Among the precedent transactions, for instance, was Temasek’s MGO in September 2021 for Sembcorp Marine in the wake of the company’s rights issue at a deeply discounted price of S$0.08 per share.

Temasek had provided an undertaking to subscribe for its entitlement to the rights shares as well as a portion of the excess rights shares. This resulted in Temasek’s stake in Sembcorp Marine increasing from 42.6 per cent to 46.6 per cent.

The increase in Temasek’s shareholding in Sembcorp Marine by more than one percentage point triggered an obligation for it to make an MGO for the company at S$0.08 per share.

This offer price was 8 per cent below Sembcorp Marine’s VWAP during the preceding one month, and 29.8 per cent below its VWAP during the preceding three months.

Sembcorp Marine is now called Seatrium.

MGOs versus VGOs

While the precise circumstances of each MGO are different, it seems inappropriate to benchmark the offer for Dyna-Mac against such precedent transactions.

For starters, the Dyna-Mac deal is a voluntary general offer (VGO) rather than an MGO. More to the point, the offeror had plainly demonstrated that it was prepared to pay up in order to gain control of Dyna-Mac.

When the offeror first announced its VGO with an initial offer price of S$0.60 per share, Dyna-Mac’s share price had already risen by 48 per cent since the beginning of the year.

Hanwha Ocean and Hanwha Aerospace held about 24 per cent of Dyna-Mac’s shares at that point. Most of this stake had been acquired at S$0.40 per share from Keppel in May.

The subsequent revision of the offer price to S$0.67 per share further demonstrates the offeror’s determination to enlarge its stake in the company.

While the offeror has said it does not intend to pursue a delisting Dyna-Mac, it has also said it will take no action in the event the free-float requirement is not satisfied at the close of the offer and trading in Dyna-Mac is suspended.

The offeror has further stated that it will exercise its compulsory acquisition rights if the level of acceptances allows it to do so.

High profitability overlooked?

Another factor the IFA said supported the fairness of the deal is that the final offer price of S$0.67 per share is nearly six times Dyna-Mac’s adjusted net asset value (NAV). This is way above the 1.26 times mean price-to-NAV ratio garnered by seven “comparable” companies the IFA considered.

However, these comparable companies – which included Singapore-listed Seatrium and Kuala-Lumpur-listed Malaysia Marine and Heavy Engineering – had a mean trailing 12-month return on equity (ROE) of 11.2 per cent.

Dyna-Mac had a much higher ROE of 55.8 per cent. In fact, Dyna-Mac’s return on assets and net profit margin were also vastly better than the comparable companies.

It could be argued that the relatively high price-to-adjusted NAV implied by the final offer price for Dyna-Mac should not have been cited as a factor supporting the fairness of the offer, without also explicitly considering the company’s very strong profitability.

Scrutinise work of IFAs

To be clear, this column is not challenging the IFA’s conclusion that the offer for Dyna-Mac is fair and reasonable.

Dyna-Mac operates in a competitive and cyclical sector, and it is probably unwise to assume that its currently high profitability will last indefinitely.

Also, the offer price premium versus precedent non-privatisation transactions was only one of a number of angles from which the fairness of the deal was analysed.

Nevertheless, it is important that boards and investors scrutinise the work of IFAs, and push them to justify their views and recommendations.

Investors tend to question IFAs when offer prices are below the NAVs of target companies, especially if those companies are holding assets that have visible private market valuations, such as real estate or cash and securities.

They should not be any less wary when offers are well above the NAV of target companies that are highly profitable and positioned to grow fast.