By Khairie Hisyam
Yet another privatisation bid usually brings yet another seemingly contradictory independent advice on how the offer is grossly unfair yet reasonable for minority shareholders to accept. There must be a better way to put minority shareholders on a more even footing.
On Dec 28, logistics outfit NCB Holdings released the independent advice by Kenanga Investment Bank on its proposed privatisation by MMC Port Holdings Sdn Bhd, a subsidiary of MMC Corporation Berhad.
It is a 108-page document from which the main takeaway for minority shareholders is this: accept this unfair offer because you are screwed otherwise. But there has to be a better way to do these deals from the minority shareholder perspective.
In case you missed the newsflow on this deal, on Nov 25, 2015 NCB Holdings received an unconditional take-over offer from MMC Port. The offer came after a shares acquisition deal worth RM1.1 billion – through which MMC Port bought a 53.42% shareholding in NCB Holdings from Permodalan Nasional Berhad (PNB) – became unconditional on the same day.
That 53.42% bumps MMC Port’s shareholding to 83.55% from about 30.13%, a stake which it acquired through three deals between November 2014 and July this year. For the remaining shares, it is offering RM4.40 per share to be satisfied in cash. NCB Holdings shareholders has until 5.00pm on Jan 6, 2016 to decide unless this deadline is further extended later.
Now on to the independent advice from Kenanga. Its conclusion was that the offer from MMC Port is “not fair but reasonable” and it recommended that shareholders accept it. Let’s look at why.
After a sum-of-parts valuation on the company, Kenanga decided that the offer price is not fair because it is at a discount of between 8.3% and 12.2% to the shares’ fair value, which it thinks range between RM4.80 and RM5.01 per share.
However Kenanga also thinks the offer is reasonable, because among others the offer price of RM4.40 per share is a premium of as much as 23.3% to the counter’s historical trading price – which only rose in the last year as MMC Port’s trail of share acquisitions progressed and fuelled expectations of a privatisation bid. Also, trading volume has been lacklustre for the NCB Holdings shares.
So it is deemed reasonable because shareholders may not get an opportunity to cash out at RM4.40 per share in the open market if they pass up on this offer and the privatisation does not take place.
This carrot aside, however, the stick is also looming large: since MMC Port does not intend to keep NCB Holdings listed regardless of how many minority shareholders accept its offer, dissenting shareholders may find their shares in NCB Holdings devalued drastically after the company becomes suspended from trading or is unlisted, not to mention with very limited avenues through which to sell these shares.
In other words, if you’re a minority shareholder in NCB Holdings and do not accept this offer now, you’re probably going to be screwed when the dust settles. This is arguably a big factor in Kenanga’s recommendation for acceptance despite the unfairness of the offer.
So it does not seem like the minority shareholders have much choice but to swallow this deal here which is essentially a compulsion. This raises (again) a long-running question whenever independent advisers provide their evaluation on privatisation offers: how reasonable can an unfair offer really be?
It may seem a contradiction when independent advisers reach this sort of conclusion. Recall back in September 2012 that the Securities Commission decided, after some public consultation, that fairness and reasonableness of an offer be evaluated separately.
The end-recommendation most of the time, however, still appears dependent on the more subjective of the two: reasonableness, which often hinge on whether the shareholder has any feasible alternative other than accepting the offer at hand, no matter how unfair (in most cases it is unfair).
This should not be the case as it is possible to promote a fairer pricing vis-a-vis offers while maintaining sufficient incentives for deals to happen.
One possible way to do this is to consider requiring all privatisation offers to be within a certain range of a company’s fair value, which includes fresh valuations on all assets and properties, among other things.
At a glance, this idea may accomplish at least two things. First, minority shareholders are assured some protection from losing out on hidden gems within the company just because they have no other practical choice but to accept an unfair offer.
Second, the offering party are still allowed some room from which to profit from undertaking the privatisation, whether from the assets held by the company or further growth of its businesses.
For minority shareholders, at least this particular idea may accord some protection from potential exercises that are eyeing a disparity in information vis-a-vis current valuations.
A glaring instance had been the privatisation of Delloyed Ventures in 2014, where minority shareholders had to accept a meagre RM4.80 per share – technically a generous 20% premium to market performance of the counter – for a company that may be worth as much as RM20 per share or more.
More recently, in early December MWE Holdings shareholders may feel nonplussed when its largest shareholder made an offer and asked for the board to decide in just nine days, then refusing a request for an additional month to consider the offer and calling it off altogether.
It remains unclear what transpired but KINIBIZ previously raised questions on some outdated valuations for MWE Holdings’ properties as well as whether any of them are prime for compulsory state acquisition for large infrastructure works.
Such situations invariably puts the minority shareholders between a rock and a hard place – reject the (sometimes) absurdly unfair offer and risk getting stuck in the twilight zone with nigh worthless shares or accept it to let hidden gems you partially own go at a massive, massive discount that should be unpalatable in any other circumstance.
And the underlying picture that emerges is perhaps we have not put in sufficient safeguards to protect the little guys in the market, too.
GRRRRR!!!
You must be logged in to post a comment.