TTJ offer: IFA, directors unexpectedly adopt pro-minority stance; regulators should too

MINORITY shareholders of TTJ Holdings might have been surprised to learn last week that the company’s board is recommending they reject the cash offer of S$0.23 per share from THC Venture, a privately held company owned by TTJ’s controlling shareholder and executive chairman Teo Hock Chwee.

The recommendation is based on the advice of Zico Capital – the independent financial adviser (IFA) to the recommending directors – which said the offer is neither fair nor reasonable.

In a nutshell, the IFA said TTJ is a profitable structural steel company with an ungeared balance sheet; and the offer price is significantly less than the value of the assets on its books.

This is something many minority shareholders of TTJ already know, of course. But Zico Capital has arguably stoked opposition to the lowball offer from THC Venture with its advice and the analysis that accompanied it.

For instance, many investors were already aware the offer price is nearly 37.5 per cent less than TTJ’s net asset value (NAV) of S$0.37 per share as at Jan 31. But the IFA said after making adjustments for the sale of certain assets in Malaysia completed after Jan 31 and marking TTJ’s real estate assets to their “market value”, the company’s NAV would notionally be S$0.46 per share.

The IFA ultimately put the estimated value of TTJ shares between S$0.37 and S$0.46, noting the wide differential is attributable to the revaluation surplus of the company’s properties.

When comparing the valuation ratios implied by the offer price with comparable companies, the IFA was careful to highlight their inferior qualitative attributes. For instance, the IFA pointed out that the peer companies had been loss-making and were geared. Moreover, TTJ had a higher current ratio than any of them.

The IFA also seemed to obliquely blame TTJ’s controlling shareholder Teo for the depressed market value of the company’s shares.

It noted that Teo held 234.5 million shares when TTJ was listed back in 2010, representing a 67 per cent stake in the company. In 2015, Teo bought 400,000 shares in the market at S$0.34 per share and a further 60 million shares in off-market trades at S$0.345 per share.

He now holds a deemed and direct interest in 294.9 million TTJ shares, representing an 84.4 per cent stake in the company. “The reduction in the free float may have had a bearing on the subsequent share price performance and trading liquidity of the shares,” the IFA said, in its letter to the recommending directors.

Long-serving IDs

Rightly or wrongly, investors often assume that boards of tightly controlled companies – and, consequently, their advisers too – are of the same mind when it comes to major corporate actions.

The position that Zico Capital has taken is all the more remarkable given that 3 of the 4 recommending directors are independent directors (IDs) who have served on TTJ’s board for more than 9 years – the threshold at which their perceived independence must be tested in a 2-tier shareholder vote.

Lim Yian Poh and Ling Chien Yien were appointed IDs way back in 1996, according to TTJ’s last annual report. Leong Yee Yew was appointed in 2010.

Ling and Leong were re-elected under 2-tier votes on Nov 4, 2020, with 100 per cent support from minority shareholders who voted. Lim was re-elected on Nov 30, 2021, under a 2-tier vote with almost unanimous support from minority shareholders.

Interestingly, the fourth recommending director – Chiong Su Been – is an executive director of TTJ and the company’s chief financial officer. She has declared that she intends to accept the offer with respect to all the TTJ shares she owns. (She holds more than 1.1 million TTJ shares, representing a 0.32 per cent stake in the company.)

Offer price revision?

What does all this mean for investors? Are minority shareholders of TTJ headed for a big payday?

The trajectory of TTJ’s share price could determine what happens next.

On Monday (Jun 27), the first trading day after the circular with the IFA letter was published, TTJ surged above the offer price to hit an intraday high of S$0.28 before falling back. On Tuesday (Jun 28), the stock closed at S$0.245 – some 6.5 per cent above the offer price.

If TTJ’s share price remains significantly above S$0.23 in the days ahead, Teo might well raise his current offer price.

But if the stock goes back down to the S$0.23 level, Teo might be inclined to just sit tight and bet that minority shareholders will come across in sufficient numbers to enable him to exercise the right of compulsory acquisition and take TTJ private.

The Companies Act allows an offeror to exercise the right of compulsory acquisition once it obtains 90 per cent of a target company’s shares that it and its related companies do not already own.

But Teo is exploiting a loophole in the law that enables individuals who are controlling shareholders of listed companies to have shares they own count towards the 90 per cent acceptance threshold by setting up a special purpose vehicle to make the offer.

Teo has provided an irrevocable undertaking to accept the offer from THC Venture with respect to his 84.4 per cent stake. This means THC Venture will only have to obtain a further 5.6 per cent of TTJ’s shares before reaching the 90 per cent threshold that will enable it to compulsorily acquire the rest of TTJ’s shares – which is not a big hurdle.

The offer – which is conditional on THC Venture garnering 90 per cent of TTJ’s shares – is scheduled to close on Jul 8 at 5.30 pm.

The Business Times said last month that it seems strange Singapore’s market regulators have felt unable to challenge this market practice, which is clearly not in keeping with the spirit of the law.

With the pro-minority investor stance that TTJ’s IFA and recommending directors are unexpectedly taking, it would be a shame if regulators choose to continue sitting on their hands.