IFAs should use appropriate valuation basis to assess companies in take-private deals

THE lowball voluntary unconditional cash offer for Amara Holdings closed last week with the offeror – a special purpose vehicle owned by the controlling Teo family and private-equity firm Dymon Asia – securing nearly 88.4 per cent of its shares.

This is short of the 90 per cent shareholding threshold that would have resulted in trading being suspended, and the offeror being able to compulsorily acquire the remaining shares.

It may be a matter of time before Amara is delisted, though.

Dymon has proven to be a determined acquirer, and its past deals suggest it may eventually make another attempt to take Amara private.

The big question is whether minority shareholders of Amara who held out during the recent offer will be rewarded.

Amara’s appointed independent financial adviser (IFA) – a firm called Xandar Capital – said the recent offer price of S$0.60 per share was both fair and reasonable. This meets a key requirement for exit offers in conjunction with voluntary delistings.

Hence, the Teo family and Dymon may have little incentive from a regulatory standpoint to offer much more than S$0.60 if they were to try taking Amara private again.

Moreover, Amara’s already-weak trading liquidity may now weaken further as a result of its narrowed public float. This might weigh on the market price of its shares.

What would it take for minority shareholders of Amara to get a better offer than S$0.60 per share? The way I see it, IFAs appointed to assess privatisation offers do not place sufficient weight on how the basis of valuation for a public-listed company would change once it goes private.

Instead, IFAs often focus too much 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 precedent take-private deals.

This often results in minority investors feeling shortchanged. Many companies own assets with private-market valuations that are plainly visible to public investors. Indeed, many investors choose to own shares in such companies in anticipation of this value being unlocked one day.

Discount to RNAV

The offer price of S$0.60 per share for Amara was 10 per cent below the company’s net asset value (NAV) of S$0.6669 per share as at Jun 30, and 51.9 per cent below its revalued net asset value (RNAV) of S$1.247 per share.

In my view, this ought to have been sufficient to conclude that investors should reject the offer. If Amara were to become a privately held company, it would be valued by investors and financiers on the basis of its RNAV. Offering to buy out minority shareholders at less than half this value is plainly unfair.

Yet, Xandar Capital gave significant weight to the market valuations of comparable companies such as Far East Orchard, Hotel Properties, and OUE. Based on the mean and median EV/EBITDA (or enterprise value-to-earnings before interest, taxes, depreciation, and amortisation) ratios of such comparable companies, the value of Amara’s shares would be between S$0.53 and S$0.54.

The IFA also looked at the valuations at which other companies had been taken private – especially those in the real estate sector such as Lian Beng Group, Chip Eng Seng and Hwa Hong Corp. Based on the mean and median P/RNAV ratios at which these and other property companies went private, Amara would be worth between S$0.82 and S$0.88 per share.

“Overlapping both approaches, the estimated value of (Amara) ranges between S$0.53 and S$0.88 for each share,” Xandar Capital said in its letter to Amara’s recommending directors. It added that the offer price of S$0.60 fell within this range of values.

IFAs facing scrutiny

Singapore’s market regulators do not prescribe exactly how IFAs should assess general offers or delisting proposals. Instead, a lot of importance is placed on IFAs being independent and unburdened by conflicts of interest, and exercising diligence, objectivity and transparency in their analyses and opinions.

When judging the “fairness” of an offer, IFAs are expected to weigh the offer price against the value of the company’s shares. An IFA may assess the value of a company’s shares by applying a suitable earnings multiple, coming up with a discounted cash flow model, or calculating the company’s NAV or RNAV.

On the other hand, the “reasonableness” of an offer hinges on factors such as the trading liquidity of the stock, or the likelihood of an alternative offer being made.

Minority investors are not being served well by this approach, in my view.

To begin with, IFAs are paid a fee for their services and have no incentive to find fault with deals put forward by a company’s controlling shareholders.

More to the point, the supposed independence and objectivity of IFAs has not stopped them from waving through lowball offers for companies such as Amara.

Singapore Exchange Regulation (SGX RegCo) warned in July last year that IFA opinions face more scrutiny from investors when the offer price is below the target company’s NAV or RNAV. The frontline regulator called on IFAs to clearly explain their opinions when such queries are raised.

My own view is that there would be less scrutiny from investors if the IFAs were pushed to adopt an appropriate valuation basis for public-listed companies moving into the private market.

Unlocking value

Of course, much depends on the willingness of investors to hold out against lowball offers. Last year, Dymon and two officials of Penguin International made an offer for the company at S$0.83 per share.

They already held more than 80 per cent of Penguin’s shares, following an offer in 2021 at S$0.65 per share.

At the close of their second offer, the offerors held more than 88.9 per cent of Penguin’s shares.

Dymon also succeeded in taking Challenger Technologies private with the controlling Loo family at S$0.60 per share last year.

In 2019, minority shareholders of Challenger blocked a proposal by the Loo family and Dymon to take the company private at S$0.56 per share.

Dymon did not give up, though. In 2021, Challenger said that Dymon would subscribe for nearly 56.6 million new shares at S$0.58 each. Including the nearly 3.3 million shares Dymon already held at that point, the new share subscription gave Dymon a 14.9 per cent stake in Challenger.

If this illustrates anything, it is perhaps that Singapore stocks could become more interesting with some vision from controlling shareholders and more prescriptive guidelines for IFAs to ensure minority investors are properly compensated.