[singapore] This column suggested last week that shareholders of Singapore Paincare think twice about accepting the recently announced offer at S$0.16 per share, and hold out for a better deal.
The privatisation offer by way of scheme of arrangement comes only five years after the company sold shares to investors at S$0.22 each, and listed on the Catalist board of the Singapore Exchange (SGX).
Earlier this week, however, any hope of improved terms were dashed. On Jun 10, the offeror said it did not intend to increase the scheme consideration.
Singapore Paincare’s shares slipped 4.8 per cent on Wednesday (Jun 11) to close at S$0.16.
Much now depends on what Singapore Paincare’s independent financial adviser (IFA) thinks of the deal on the table. In order for a company to delist from SGX, its shareholders have to be provided with an exit offer that an IFA deems to be “fair and reasonable”.
Given the central role IFAs play in transactions that pit majority shareholders against minority investors, their work tends to be closely scrutinised – especially when it involves companies that have been trading at depressed valuations, which is often the case nowadays.
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Big discounts to NAV
Just last month, Sinarmas Land’s IFA found itself under fire for its evaluation of a take-private offer at S$0.31 per share – which represented a 63.6 per cent discount to its net asset value (NAV) of S$0.85 per share.
The IFA came up with a range of values for Sinarmas Land shares of between S$0.35 and S$0.361, and decided the offer was “not fair but reasonable”. Nevertheless, it advised Sinarmas Land’s independent directors to recommend shareholders accept the offer.
The Securities Investors Association (Singapore), or Sias, took issue with the IFA’s advice, and its assessment of the offer. In particular, Sias questioned the “holding company discount” applied to the sum-of-the-parts (SOTP) valuation used by the IFA to arrive at its range of values – pointing out that the IFA had already applied discounts at which precedent take-private transactions had been done on the group’s unlisted assets in the SOTP model.
“We contend that the unlisted assets have effectively been double-discounted in the SOTP analysis,” Sias said in a statement on May 5. The IFA defended its work, stating that its methodology was consistent with widely accepted industry practice and professional standards.
On May 10, Sinarmas Land’s controlling shareholder hiked its offer price by nearly 21 per cent, to S$0.375.
Despite the revised offer price still being well below Sinarmas Land’s NAV per share, acceptances topped 90 per cent of the shares held by minorities, which enabled the offeror to compulsorily acquire the remaining shares.
Questionable comparisons
Sinarmas Land was not a unique case, of course. Companies such as Chip Eng Seng and Lian Beng were also targets of plainly lowball offers that ultimately succeeded.
When Singapore Exchange Regulation published its guidelines on IFAs in July 2023, it observed that investors tend to question offers pitched at a significant discount to the target company’s NAV or revalued NAV. The frontline market regulator urged IFAs to clearly explain the bases of their opinions when questions are raised in these cases.
Yet, IFA opinions have drawn attention even when they are not about offers for asset-rich companies with depressed share prices. Late last year, this column spotlighted the Hanwha group’s pursuit of Dyna-Mac, a fabricator of topside modules for floating, production, storage and offloading (FPSO) vessels.
Hanwha initially held a 24 per cent stake in Dyna-Mac, most of which was purchased from Keppel at S$0.40 per share in May last year. In September, it launched an offer for Dyna-Mac at S$0.60 per share, before raising it to S$0.67 per share in the face of resistance from a large shareholder.
Dyna-Mac’s IFA said the offer was fair and reasonable, and Hanwha achieved an acceptance rate that enabled it to invoke its compulsory acquisition rights and delist the company.
Here’s the thing: Hanwha’s offer was conditional on it obtaining a more than 50 per cent stake in Dyna-Mac. The offeror said at the outset that it was not actively looking to delist Dyna-Mac, but that it would not restore the target company’s free float if it was lost.
This led Dyna-Mac’s IFA to focus on precedent transactions where the offerors had indicated an intention to maintain the listing status of the target companies. Almost all of these deals were mandatory general offers (MGOs), made for technical reasons rather than because the offerors necessarily wanted to enlarge their stakes.
In fact, these precedent non-privatisation offers were, on average, priced 6.3 per cent below the target companies’ volume weighted average prices over the preceding one and three months.
This seemed inconsistent with Hanwha’s willingness to pay up for control of Dyna-Mac.
Acceptable metrics
While IFA opinions do not always definitively influence the outcome of take-private offers, it is important that they are not completely out of step with the thinking of the majority of investors.
Last week, the IFA appointed by Great Eastern Holdings (GEH) provided an assessment of OCBC’s exit offer based on comparisons of a variety of metrics, including price-to-NAV and price-to-earnings ratios as well as comprehensive equity.
Yet, its range of values for GEH was based solely on embedded value (EV) – a metric that is widely accepted by the insurer’s own minority shareholders.
The IFA set the upper bound of its range of values for GEH at S$37.63 per share, which is simply GEH’s reported embedded value (EV) at end-2024 of S$38.08 per share, adjusted for a dividend of S$0.45 per share paid on May 6.
The lower bound of the range was set at S$30.10 per share, which is GEH’s dividend-adjusted EV after applying the average 0.8 times discount at which comparable insurers have traded versus their respective EVs over the past 10 years.
The IFA said that OCBC’s exit offer of S$30.15 per share, which falls within its range of values, is fair and reasonable.
As Singapore Paincare’s IFA evaluates the company’s privatisation deal, it should perhaps draw lessons from these transactions.
