Apr 24, 2014

    Market to blame for privatisation grumbles

    THE local market has been gripped by takeover/privatisation fever in recent days, with announcements on a flurry of these exercises.

    UIC kicked things off with its offer for Singapore Land, then CapitaLand grabbed the headlines with its plan to buy out all of CapitaMalls Asia (CMA), while a private consortium headed by Hotel Properties (HPL) boss Ong Beng Seng tabled a takeover of HPL that could eventually lead to it being delisted.

    This, in turn, has sparked off a search for the next big privatisation play and driven the local market higher, as if this was something to be celebrated and trumpeted.

    Truth be told, it isn't.

    On the contrary, it is a damning indictment of a market aspiring to be a major gateway for global finance that good-quality companies are being persistently mispriced by a supposedly efficient market.

    It isn't really efficient by any stretch, but let's pretend for argument's sake that it is. But once the delistings are done and dusted, a void will appear that will take years to fill.

    The main victims of the market's mispricing are minority shareholders. In almost all cases - those past and present - there is unhappiness at "low" offer prices.

    In the case of the present crop of takeovers, which are primarily property plays for which asset/book values are generally used as valuation benchmarks, one complaint is that the discount to asset values is simply too large to be considered fair.

    Another related complaint is that if there is a multiple of book value offered - as is the case with CMA (more on this later) - it isn't large enough.

    While sympathies must lie with shareholders whose entry prices are higher than the offer price, it is a fact of commercial life that some will win and some will lose. Those who bought in the most recent months prior to offers being made would be the biggest winners; those who bought years earlier when the market price was higher could feel aggrieved.

    Offerors, however, are not in the game of making everyone happy, and will always try for the lowest price they can secure.

    This can often mean not offering full value. Instead, their game plan is to put forth a price that is just sufficiently higher than the prevailing market to hopefully entice majority acceptance, but is low enough to allow for a margin to be made after full ownership is achieved.

    In other words, it is a careful balancing act that involves straddling the market on the one hand, and other valuation benchmarks on the other.

    In the case of CapitaLand/CMA, for example, the $2.22 that CapitaLand is offering is the highest in about 15 months, even though it is only 1.2x CMA's $1.87 book value per share. The latter, it has been argued, is too low since, when CMA listed some 31/2 years ago, it was priced at 1.55x book value.

    This is true, but it is also correct to say that CMA has languished for many more days at below $2.22 since it was listed than above it, which suggests that shareholders have had to put up with years of undervaluation. In fact, the stock has traded above $2.22 only once in the last three years.

    Also, the $2.22 is a premium of 27 per cent over the prevailing market, which is much better than the 15.6 per cent offered to HPL shareholders, the 17 per cent offered for Global Premium Hotels and the 16.9 per cent for SingLand.

    Seen in this context, it means the CMA offer is decent, given existing circumstances. Not earth-shatteringly generous, mind you, but decent.

    Whether shareholders accept remains to be seen, but the point is that CMA and all the others before it illustrate the harsh reality that, sometimes, market prices will not necessarily reflect economic or perceived realities.

    Minority shareholders might think that an efficient market should recognise value when it sees it, but this is not always the case. If you look hard enough, it's even possible to find companies trading below their cash values, never mind asset values.

    This has been a perennial problem with all markets, but possibly one that has been accentuated over the past year in Singapore, with international investors shunning emerging markets in the wake of the United States Federal Reserve's tapering of its monetary stimulus.

    Ultimately, shareholders of offeree companies have to ask themselves if they should wait for the market to "correctly" price their shares - in which case it could take years because of perennial market failure - or take what's on the table now.