Investor activism may be key to reviving market

THE independent financial adviser (IFA) on the delisting of Golden Energy and Resources (Gear) issued a press release last month to “categorically refute” this column’s assertion that its opinion on the deal was faulty.

It should not have bothered. The press release essentially reiterated what had already been said in Gear’s circular to its shareholders.

More importantly, the delisting proposal – which the IFA had said was fair and reasonable – received 99.9 per cent support when it was eventually put before minority shareholders of Gear at an extraordinary general meeting (EGM) on Jun 9.

Votes from nearly 508.5 million Gear shares were registered at the EGM – equivalent to more than 85.6 per cent of the company’s shares not held by its direct controlling shareholder, which abstained from voting.

Why was there such widespread support for such a lowball offer? One explanation is that many investors simply did not believe they would ever get a better deal from Gear’s controlling Widjaja family.

Indeed, the terms of the deal had already been sweetened earlier this year – with minority shareholders of Gear being offered as much as 15 per cent more for their shares. Moreover, Gear had rallied by more than 400 per cent over the preceding two years.

Yet, IFAs play a crucial role when companies choose to delist from the Singapore Exchange (SGX). Under Rule 1309, shareholders of a company proposing a voluntary delisting must be provided with an exit offer in cash. The company must also appoint an IFA, and “the IFA must opine that the exit offer is fair and reasonable”.

Gear’s delisting proposal could well have been jammed up if its IFA had not decided the terms of the transaction were “fair and reasonable”. But would this have resulted in the Widjaja family sweetening the terms of the deal even more? Or, would it have resulted in the deal being called off?

Would investors have been able to count on the market eventually ascribing a higher value to their shares than what was on offer?

Great Eastern not great

This past week, there was a brief flurry of trading activity in Great Eastern as OCBC bought nearly 2.35 million shares in the insurer at S$16.99 per share. This raised OCBC’s stake in Great Eastern from 87.9 per cent to 88.4 per cent.

Investors with long memories will recall that OCBC tried and failed to take Great Eastern private twice over the last two decades: in 2004 and in 2006. Minority investors who bet Great Eastern would be worth more in the future were not wrong. At the end of last year, Great Eastern estimated its embedded value to be S$37.81 per share. This was more than three times its embedded value at end-2006 of nearly S$11.89 per share.

Yet, Great Eastern’s share price has barely budged over the past 16 years. The block of Great Eastern shares that OCBC bought last week was priced at an eye-watering discount to embedded value of 55 per cent.

With Great Eastern trading at such low valuations, OCBC may well decide at some point to make another offer for the insurer. In the meantime, it would not be in OCBC’s interest for any steps to be taken to boost the market value of Great Eastern’s shares – through wider ownership or more analyst coverage, for instance.

This vicious cycle – of Great Eastern’s low valuations making it a potential privatisation target, which in turn makes it unlikely that anything will be done to lift its market valuations – is writ large across a significant segment of Singapore-listed companies with low valuations and narrow free floats.

With even very high quality companies failing to garner decent valuations in the local market, requiring exit offers to be “fair and reasonable” has not always made investors feel they were adequately compensated.

Resentment and mistrust

For one thing, the opinion of the IFA ceases to matter once the offeror obtains enough shares to exercise the right of compulsory acquisition. Structural steel specialist TTJ Holdings went private last year through this route, following an offer from its controlling shareholder that its IFA said was neither fair nor reasonable.

The board of a target company is also not precluded from recommending a privatisation deal that the appointed IFA has found to be less than “fair and reasonable”. Boustead Project’s IFA said earlier this year that the offer from Boustead Singapore was not fair but reasonable. Yet, the IFA advised the board of Boustead Projects to recommend shareholders accept the offer – which the board did.

Boustead Singapore ended up owning 95.5 percent of Boustead Projects, but it was not able to exercise the right of compulsory acquisition. Trading in Boustead Projects is now suspended due to the loss of its public float.

Boustead Projects said last week it had applied to SGX for a further three months beginning Jun 27 to restore its public float. It said Boustead Singapore was still exploring various options.

Then, there are companies such as Gear – which have gone private on terms that seemed inadequate but that their IFAs said were “fair and reasonable”.

In March, the Securities Investors Association (Singapore) or Sias lamented in a commentary that the “ridiculous lowball” offers foment investor resentment and mistrust in the local market.

Sias suggested the authorities look into the usefulness of IFA recommendations, as well as the potential conflicts of interest surrounding their appointment. It also called for stringent rules determining the independence of directors tasked with evaluating privatisation offers.

Barbarians at the gate

Yet, a more potent solution might lie in the market itself. The reason “ridiculous lowball” offers are made is because many of them actually succeed. Tired of waiting for the market to ascribe a genuinely fair and reasonable price to shares they own, many investors are all too ready to throw in the towel when a lowball offer is made.

That may change over time. Earlier this month, Quarz Capital requisitioned an EGM to internalise the manager of Sabana Industrial Reit – arguing the move will result in cost savings that will boost the real estate investment trust’s distributions per unit.

Quarz has been at war with Sabana Reit’s manager and sponsor group since 2020, when the activist investor successfully organised resistance to a merger proposal that was patently unfair to Sabana Reit’s unitholders.

Since then, Quarz – which now owns a more than 15.4 per cent stake in Sabana Reit – has continued to harangue the manager over its performance as well as the appointment of independent directors. It also mobilised unitholders of Sabana Reit to deprive the manager of the mandate to issue new units at the recent annual general meeting.

Quarz last week sparred with Sabana Reit’s manager over its internalisation proposal, and dismissed some of the concerns raised by the manager as “empty threats”.

In my view, the Singapore market could be ripe for a surge in this sort of activist investor participation. And, more than any form of regulation, having these barbarians at their gate could be what forces companies to focus on improving the market value of their publicly-traded shares rather than going private.

Catch Ben Paul at Mark to Market “Live” where he will moderate a panel discussion about whether the Singapore market is still a good place for investors to hunt for income and more. The event takes place on Jul 15 (10 am to 1 pm) at The Capitol Kempinski Hotel. Sign up now at bt.sg/m2mlive23. Limited seats left.