Sinarmas Land minorities should be incensed by lowball offer from its controlling shareholder

[SINGAPORE] Lowball offers are not a rarity in the Singapore market, but the deal presented to minority shareholders of Sinarmas Land last week could be worth watching closely.

For one thing, the offer price of S$0.31 per share was only 12.7 per cent above Sinarmas Land’s last closing price before the deal was announced. In fact, Sinarmas Land shares were trading above the offer price only in January.

The offer price is also a steep 73.9 per cent discount to Sinarmas Land’s net asset value (NAV) as at Jun 30, 2024, of S$1.19 per share. Even if the offer price is eventually hiked by 20 per cent, it would still be a hefty 68.7 per cent below Sinarmas Land’s NAV.

The offeror – a company called Lyon Investments, which is ultimately owned by a trust linked to Indonesia’s Widjaja family – seems to have an interesting justification for its miserly offer price.

The offer announcement on Mar 27 noted that almost all of Sinarmas Land’s businesses are in Indonesia, and held through two Jakarta-listed entities – Bumi Serpong Damai and Puradelta Lestari.

The offer announcement suggested this “unoptimised corporate structure” is why Sinarmas Land has failed to garner a healthy market valuation and deliver good returns to investors.

It pointed out that Sinarmas Land’s ability to pay dividends is very much dependent on the dividends it receives from Bumi Serpong Damai and Puradelta Lestari, and investors who want exposure to the group’s Indonesian businesses can invest in them directly.

In fact, the sum of the market value of Sinarmas Land’s stakes in Bumi Serpong Damai and Puradelta Lestari has been consistently higher than its own market capitalisation over the past five years, indicated the offer announcement.

From that perspective, one could argue that the offer for Sinarmas Land has come at an opportune moment. While Indonesian stocks and the rupiah have suffered big sell-offs this year, the Singapore market has been hitting new all-time highs.

By my calculations, Sinarmas Land’s stakes in Bumi Serpong Damai and Puradelta Lestari are now only worth about S$0.27 per share – or about 12.9 per cent less than the offer price currently on the table.

Should minority shareholders of Sinarmas Land take the money and run?

NAVs are real

Sinarmas Land’s corporate structure is not the only reason its shares have failed to garner a healthy market valuation. The offer announcement on Mar 27 also pointed out that the group’s property developments are capital intensive and generate lumpy returns.

This is true of all traditional property developers, of course. Within the Sinarmas Land group, Bumi Serpong Damai and Puradelta Lestari are currently trading at discounts of 58.3 per cent and 9.1 per cent to their NAVs, respectively. Duta Pertiwi, which is held under Bumi Serpong Damai, is trading 42.2 per cent below its NAV.

Yet, the assets held by such listed property companies have real value in the private market. Case in point: Bumi Serpong Damai agreed last year to buy a 91.99 per cent stake in Suryamas Dutamakmur for 531 rupiah (S$0.04) per share. It subsequently conducted a mandatory tender offer for the rest of Suryamas Dutamakmur.

This acquisition price was more than 182.4 per cent above the average highest daily trading price of Suryamas Dutamakmur’s shares during the 90 days before an announcement that negotiations were under way.

It was also nearly 17 per cent above Suryamas Dutamakmur’s NAV at the end of 2023.

Interestingly, the seller of the 91.99 per cent stake in Suryamas Dutamakmur was Top Global – another company linked to the Widjaja family.

Top Global was once listed in the local market, but it went private in 2021 following an offer at S$0.39 per share – a 46.9 per cent discount to the company’s NAV at the end of 2020.

Could Sinarmas Land unlock value in a similar fashion once it is taken private? Does the offer price of S$0.31 per share adequately compensate minority shareholders for the potential value that could be unlocked in the future?

Awaiting IFA opinion

The way I see it, minority shareholders of Sinarmas Land ought to be incensed by the lowball offer that has been put on the table, given that it comes only months after the acquisition of Suryamas Dutamakmur.

My first instinct was to suggest they press the board of Sinarmas Land to come up with alternative proposals to realise the underlying value of the group’s assets. Most of the board is currently conflicted, though. Of the nine members of the board, five are executive directors – and three have Widjaja as their last name.

Even if the four independent directors on the board have the gumption to act, it seems unlikely to me that any substantive value unlocking programme would be feasible without the support of the controlling shareholder.

In the end, much will probably depend on the views of the independent financial adviser (IFA) that Sinarmas Land appoints to evaluate the offer.

In order for Sinarmas Land to voluntarily delist in conjunction with the offer, its IFA must opine that the offer is fair and reasonable, and the offeror must achieve an acceptance rate of at least 75 per cent.

Given that the offeror already owns 70.3 per cent of Sinarmas Land’s shares, hitting an acceptance rate of more than 75 per cent would mean pushing its stake above 92.6 per cent.

Even if the IFA does not opine the offer is fair and reasonable, its estimate of the range of values for Sinarmas Land shares could be relevant. If the offeror meets the 75 per cent acceptance condition, that range of values could be an indication of an eventual exit offer.

However, if the offeror garners an acceptance rate of 90 per cent by the close of the offer, it will be able to compulsorily acquire the remaining shares and delist the company, regardless of the IFA’s views. Hitting this 90 per cent threshold would mean pushing its stake in Sinarmas Land above 97 per cent.

Investors should also keep in mind that if the offeror ends up holding more than 90 per cent of Sinarmas Land at the close of the offer, trading will be suspended, regardless of whether the offer is fair and reasonable.

Sinarmas Land shares ended Friday (Mar 28) at S$0.32 – just 3.2 per cent above the offer price.