Silverlake Axis should ask IFA to push the boundaries in assessing take-private offer

TAKE-PRIVATE deals are not uncommon in the Singapore market, but the offer for Silverlake Axis has a number of interesting elements.

For starters, the all-cash offer price of S$0.36 per share is one of two options that shareholders of the enterprise technology company may choose.

In lieu of the all-cash consideration, shareholders of Silverlake Axis may opt to exchange each share they hold for S$0.30 in cash plus one new redeemable preference share (RPS) in the offeror.

The offeror is a special purpose vehicle incorporated in Singapore called E2I. Each new RPS will be mandatorily redeemed five years from their issuance at S$0.18 each.

E2I currently has a paid-up capital of only S$2, and is wholly owned by a company called Zezz FundQ (ZZPL), which holds a nearly 74.1 per cent stake in Silverlake Axis.

ZZPL has provided an irrevocable undertaking to accept the offer. Under a “rollover arrangement”, it has agreed to be allotted and issued E2I shares in exchange for its Silverlake Axis shares.

Who is behind ZZPL? Silverlake Axis chairman Goh Peng Ooi currently owns all of ZZPL’s nearly 603 million ordinary shares.

ZZPL has also issued nearly 8.3 million redeemable convertible preference shares (RCPS) and more than 16.5 million warrants, all of which are ultimately held by a fund managed by Ikhlas Capital.

On a fully diluted basis, the Ikhlas Capital fund would hold nearly 2.7 per cent of ZZPL’s enlarged number of ordinary shares.

Ikhlas Capital describes itself as an Asean private equity fund manager headquartered in Singapore, with an on-ground presence in Kuala Lumpur, Jakarta and Manila.

Among its founding partners are Malaysian banker Nazir Razak, former Indonesia trade minister Gita Wirjawan and former Philippines secretary of finance Cesar Purisima.

Fair and reasonable?

Since the announcement of the offer – which is unconditional in all respects – Silverlake Axis has been in play. The stock closed on Tuesday (Sep 3) at S$0.38, which is 5.6 per cent above the all-cash offer price.

The big question now is whether PrimePartners Corporate Finance, the independent financial adviser (IFA) that Silverlake Axis has appointed, will find the offer to be “fair and reasonable”.

Singapore Exchange Regulation has previously said it will allow a company that is the subject of a general offer to delist only if the deal is fair and reasonable, and the offeror has obtained at least 75 per cent of the shares held by independent shareholders.

If Silverlake Axis’ IFA decides the offer is not fair and reasonable, many minority shareholders may be inclined to hold out in the hope of a higher offer price.

There is, of course, no guarantee that the offeror will sweeten the deal.

The offeror may instead bet that Silverlake Axis’ protracted underperformance, and the risk of its shares being eventually suspended, will prompt minority investors to accept the deal it has put on the table.

In the event the offeror reaches the compulsory acquisition threshold – that is, it obtains 90 per cent of the shares it does not already own – it would be able to delist the company despite the offer not being fair and reasonable.

The all-cash offer price of S$0.36 per share is 20 per cent above the company’s last closing price before the announcement of the offer, and 31.9 per cent more than its volume-weighted average price over the preceding 12 months.

During the five-year period to the day before the offer was announced, Silverlake Axis shares chalked up a negative total return of 34.7 per cent.

The company reported a 39.1 per cent decline in earnings to RM103.3 million (S$31 million) for the financial year to Jun 30, on a 2.3 per cent rise in revenue to RM783.5 million.

The all-cash offer price is 29.3 times Silverlake Axis’ FY2024 earnings per share, and 2.7 times its net asset value as at Jun 30.

Value intangible assets

This may not be sufficient to convince some minority shareholders of Silverlake Axis to accept the offer, though.

Despite its weaker profitability and poor performance of its shares in recent years, the company is a leading player in the enterprise technology sector in South-east Asia. By its own account, it serves 40 per cent of the top 20 largest banks in the region.

Silverlake Axis said in a statement accompanying its FY2024 results that IT spending in the financial services sector is “at best cautious”, because of economic uncertainties.

Yet, it seems reasonable to assume the company’s brand and long-term relationships with its customers put it in a strong position to benefit from future growth in IT spending by financial institutions in South-east Asia.

Silverlake Axis said that it plans to focus on advancing artificial intelligence as a strategic area of growth.

The company’s board should perhaps ask its IFA to go beyond merely comparing the valuations implied by the offer price to the public-market valuations of similar companies; and the valuations garnered by companies in precedent take-private deals.

The board could, for instance, try to provide the IFA with information to make some attempt at putting a value on the company’s brand and customer relationships.

Such an approach would certainly be novel, but the thinking behind it is not unconventional. In fact, the International Valuation Standards Council recently published a series of papers that explored the valuation of such intangible assets.

To be clear, this column is not suggesting the offer for Silverlake Axis is inadequate, or that the methods IFAs ordinarily use are wrong.

Yet, pushing the boundaries in assessing the offer from E2I would underscore the board’s independence on the matter, and signal its confidence in the value creation capacity of the company.