What's behind that RTO door?

Sometimes also called a backdoor listing, what it simply means is listed companies, facing a deterioration of their original business, try to salvage whatever value there is in the listed shell by allowing new controlling shareholders to come in and inject a new business that can hopefully turn the fortunes around.

In fact, staying listed on the SGX appears to be the name of the game for many recent RTO exercises. Most recently, Chaswood Resources, a struggling F&B operator, on Aug 22 announced it is undertaking an RTO deal worth around US$1 billion ($1.4 billion) that will see it from selling pasta to making lithium-ion batteries.

The company is doing so by issuing 35.7 billion new shares at 2.8 US cents or 3.8 cents each to acquire 3DOM (Singapore), which is owned by Japan-incorporated parent company 3DOM Inc.

According to Chaswood Resources, 3DOM (Singapore), the target, has been granted by 3DOM Inc an irrevocable exclusive global licence to manufacture and sell next-generation lithium-ion batteries using 3DOM’s next-generation lithium-ion battery technology.

3DOM (Singapore) also holds the sub-licensing right of such technology and has “firmed up” suppliers and OEM plants to fulfil orders from battery firms and global automobile manufacturers for deliveries in mid-year 2022.

Elsewhere, Mainboard-listed China-based commercial explosives manufacturer Fabchem China is acquiring Lincotrade & Associates for $25 million in 113.6 million new Fabchem shares. Lincotrade & Associates is primarily involved in interior design, renovation and carpentry services. It also carries out interior fitting-out works and manufacturing.

Another company is Jackspeed Corp, also from the Mainboard. The former specialised leather seat cover supplier, which had obtained an extension to meet SGX’s listing requirements, is acquiring FSN Asia for $10 million in new Jackspeed shares. FSN Asia is a digital marketing and blockchain company founded by Cho Changhyun. It has subsidiaries across Singapore, Thailand, Indonesia, Vietnam, Philippines, China and Taiwan.

On the other hand, Catalist-listed Advanced Systems Automation (ASA), the former manufacturer of automated equipment for encapsulation in semiconductors, is acquiring Excelgames Interactive Asia Holdings for $114 million in new ASA shares and $6 million in cash.

With operations in Singapore and Hong Kong, Excelgames is involved in the marketing and distribution of video games and video game-related hardware and software as well as the operation of an e-sports arena.

Meanwhile, there are two other companies that had wanted to pursue an RTO. However, their move appears to have been dashed — at least for now.

On Aug 7, Axington — linked to scandal-tainted businessmen and cousins Nelson Loh and Terence Loh — announced that its proposed acquisition of a 60% stake in Veivo Web Technology had lapsed. This came a month after it signed a non-binding memorandum of understanding (MOU) with Delta Investment Holding Group for the stake.

Veivo Web Technology operates an instant messaging platform, a paid application store and a cloud application platform. It has a telecommunications and information services business operating licence with its business coverage listed as information services business. The company is also the legal and beneficial owner of Quwaner Technology (Shenzhen), a WFOE (wholly foreign-owned enterprise) in China. Veivo Web Technology is buying Quwaner to have effective 100% control over and be entitled to the economic interest and assets of Beijing Ruihua Veivo Internet Technology.

Then there is BlackGold Natural Resources, an Indonesia-based coal mining company keen to acquire Mongolia-based Tengri Coal and Energy (TCE) for $1 billion in new BlackGold shares. In an Aug 12 filing, BlackGold said it did not complete a placement exercise — a necessary condition to undertake the proposed acquisition — within the agreed timeframe. Moreover, BlackGold and MGL Development — the owner of TCE — did not reach an agreement to further extend the deadline to complete the placement exercise. As a result, the sale and purchase agreement was terminated.

This year, two companies completed their RTO exercise. One is Citicode, which was previously involved in mechanical and electrical (M&E) engineering for smart cities, is now known as Livingstone Health Holdings (LHH) following the successful RTO by Livingstone Health for $72 million.

LHH has 15 medical doctors practising at 12 medical clinics and one medical spa located across several locations in Singapore. The company offers tertiary healthcare services including aesthetics, wellness and anaesthesiology and pain management.

The other is CPH, which was previously in the printed circuit board business. On Aug 19, it started trading under the new company name Shanaya. This came after the successful RTO of Shanaya Environmental Services (SES) for $22 million in cash and new CPH shares. Shanaya provides waste management, recycling and disposal services to industrial and commercial clients, many of whom are shipping companies.

Exiting cash company status

Many of these companies are attempting an RTO to avoid getting delisted since they are currently a cash company (or a shell with no or little business) or becoming one. According to SGX’s listing rules, a company will be delisted if it is unable to meet the requirements for a new listing within 12 months from the date it becomes a cash company.

In an April 22 filing, Fabchem said Lincotrade & Associates will enable the company to meet the listing requirements of a new listing on the Catalist board as it transfers from the Mainboard. This will allow Fabchem to maintain its listing status on SGX. Fabchem said it has yet to appoint a sponsor but notes that it will announce the appointment in “due course”.

Fabchem is currently disposing its sole operating and principal subsidiary Shandong Yinguang Technology for $18 million in cash. Yinguang Technology produces explosive devices called boosters in China, which are widely used in the mining, energy exploration, hydroelectric and infrastructure construction sectors.

Jackspeed’s situation is similar to Fabchem’s. In a July 4 filing, Jackspeed said that FSN Asia would provide it with the “necessary recurrent business activities” going forward. This would allow the company to meet the requirements for a new listing on the Catalist board as it transfers from the Mainboard.

Jackspeed has appointed Novus Corporate Finance as its full sponsor. Jackspeed has been a cash company since early last year when it had completed the disposal of its original core business to its executive deputy chairman and CEO Yap Kian Peng for $48 million. The disposal, the company said in a June 4, 2019, filing, was an opportunity to exit an “increasingly challenging business environment” amid the US-China trade war.

ASA is also another company hoping to avoid getting delisted through the acquisition of Excelgames. ASA is currently disposing several of its subsidiaries to ASTI Holdings, its largest shareholder, for up to $15.5 million in cash. The subsidiaries are mostly based in Malaysia and are involved in equipment manufacturing for the semiconductor sector.

ASA says the disposal allows it to reduce the outstanding debt of $8.7 million it owes ASTI. ASA had also completed the disposal of two other subsidiaries for a total of $190,000 at the turn of the year.

ASA says the proposed acquisition of Excelgames would enhance its profitability given that the latter is profitable and has “good growth potential” in the gaming industry. Moreover, Excelgames is helmed by an experienced management team that has in-depth experience in the gaming industry, it said in a June 9 filing.

Similarly, Axington says it was looking to acquire Veivo Web Technology to own a new growth business after it became a cash company. The acquisition — had it gone through — would allow Axington to remain listed on SGX, according to a July 8 filing. The company was set to pay $405 million in new Axington shares and cash for Veivo Web Technology.

The trend to avoid delisting is also seen at CPH. The company says the acquisition of Shanaya would allow it to exit its cash company status on April 2 last year.

CPH notes that Shanaya has a profitable track record and good growth potential. This will allow the company to achieve a consistent and sustainable operational and financial growth, and enhance the long-term interests of the company and its shareholders.

LHH’s case, however, is interesting. The company’s previous business was was not entirely hived off following the RTO. Instead, upon the RTO, Livingstone Health’s main business in providing healthcare services took over as the main revenue driver for the company while Citicode’s previous business operations of design and project management remained but is now focused solely on the healthcare industry. It also retained the staff from Citicode to lead this segment under LHH.

Under this segment, LHH also provides aesthetic and wellness services as well as project consultancy for Olympia Medical Hub in Phnom Penh, Cambodia. To further grow this segment, the group on April 13 signed an MOU with Hong Kong-listed China Machinery Engineering Corporation and CPG Consultants to establish a strategic working relationship in evaluating project collaboration opportunities in integrated healthcare infrastructure projects, specifically in Southeast Asia and South Asia.

“Some of the old business from Citicode had been disposed of during the RTO process. Our overall focus has shifted to some of these sort collaborations,” says Livingstone’s CEO Dr Wilson Tay, who adds that the previous board members stayed on after the RTO.

According to Citicode, the company turned its focus towards the healthcare sector given its resiliency amid the Covid-19 pandemic. “With disruptions due to Covid-19 and an imminent recession, Citicode’s commodities trading activities face additional uncertainty while its M&E projects have to contend with long gestation periods and supply chain disruptions,” says Teh Wing Kwan, executive chairman and CEO of Citicode, who was redesignated as non-executive and nonindependent chairman of LHH upon the completion of the RTO.

BlackGold’s case is also interesting. Had the RTO exercise gone through, the company would still have remained in the coal-mining industry but with more assets. TCE holds mining licences to mine coal deposits in Bayan soum, located in Mongolia’s Tuv province. TCE also owns a wholly-owned subsidiary, Tsaidam Energy, which holds licences for the construction of power plants and energy facilities in Mongolia.

According to BlackGold, the proposed acquisition is in line with its strategy to expand its business through M&As. The proposed acquisition would also diversify geographical footprint beyond Southeast Asia and vertically integrate its coal supply chain from mining to electricity power supply, it adds.

At Chaswood, the company is using the RTO exercise as a means to diversify and reinvigorate itself. “To rebuild shareholder value, the company has been seeking an appropriate business to be injected into the group,” says managing director Andrew Roach Reddy.

“The company is of the view that the proposed acquisition will place the company in a position to expand into new business areas and grow revenues, both of which will help rebuild shareholder value,” he adds.

RTO vs IPO

With many of these companies hoping to avoid a delisting through an RTO, why is it so important to have a listing status?

While a delisting option is possible, it is generally the “least desirable” option for existing shareholders of an SGX-listed company, says Jerry Chua, CEO and managing partner of Evolve Capital Asia. This is because a delist could erode the value of their investments. Hence, shareholders will look for alternatives — such as an RTO — to unlock value in their shares, he explains.

From the listed company’s perspective, Tham Tuck Seng, capital markets leader at PwC Singapore, says the listed status is an asset to them. It allows easier access to capital and provides greater liquidity to the trading of the listed companies’ shares.

“Hence, these listed cash companies may choose to sell their listing status via share swaps in the RTO transactions for a certain value, to privately held companies who have plans to go public,” he tells The Edge Singapore.

Stefanie Yuen Thio, joint managing partner at TSMP Law Corp, agrees, saying that shareholders of SGX-listed companies hope to leverage the companies’ listed status. Shareholders would vote for an RTO in one of two scenarios: The existing business cannot be revived on its own or the RTO is a strategic investment, she says. “In both such situations, it makes sense to vote for an RTO,” she adds.

But why do private companies want to undertake an RTO? Why not go for the traditional IPO route?

Yuen Thio says there is more certainty in getting listed as there are fewer regulatory hoops to jump through. Although the due diligence process in an RTO is just as rigorous as in an IPO, the process is simpler as this can be done with one EGM, she explains.

Tham says there is also certainty in valuation as the price of the RTO is negotiated only between both parties — that is the SGX-listed company and private company. “This means that the initial share price is not subject to significant changes to accommodate the market conditions, hence, reducing the dependency on IPO market window to complete this capital market transaction successfully,” he says.

Yuen Thio says companies aspiring to be listed are often at the mercy of market pricing and book-building during the IPO process. “That is often what trips up IPOs — the inability to build a good book or the market pricing may not be ideal when the IPO is set to launch. If they have to delay an IPO for market reasons, the audit would have to be refreshed, resulting in an increase in costs and further uncertainty,” she says.

In addition, an RTO offers an existing shareholder spread. As a result, the aspiring company does not need to go through a marketing process to sell shares to investors, Audrey Lam, head of investment banking and advisery at Maybank Kim Eng, tells The Edge Singapore.

However, it is crucial for the private company to choose the “right” cash company to undertake an RTO, says Tham. Among the factors to consider are the listed company’s history, residual liabilities and suitability of its existing shareholder base, he says.

On the part of SES, Shanaya CEO and executive director Mohamed Gani Mohamed Ansari says SES chose to be acquired by CPH as it was a “good match” between both companies. SES, which was founded by Ansari and his wife, had considered an IPO. But when SES was introduced to CPH, which was looking to acquire a new underlying business, it pounced on the opportunity for an RTO.

“With the RTO, the existing shareholders are already available. I believe they are strong supporters. They are looking for a good company to acquire. We are looking at a good company as a platform for our business plan,” Ansari tells The Edge Singapore in an interview.

Covid-19 factor

The advantages of RTOs over IPOs, however, may not fully explain the recent surge. Companies typically list their shares on SGX via an IPO. But so far this year, there have been five RTOs — not including the two failed RTOs — compared to four IPOs. Has the impact of the Covid-19 pandemic played any part in the RTO surge?

Alvin Soh, head of corporate finance at RHB Singapore, does not discount the possibility of Covid-19 as a catalyst for the surge in RTOs. He observes that many of the listing aspirants are companies who have seen strong demand for their products or services amid the pandemic.

Soh says: “Given the weak business environment, many listed companies have been negatively impacted and hence we believe they are now more willing to explore injection of new businesses into their companies.”

Although Tay Hwee Ling, disruptive events advisory leader at Deloitte Southeast Asia and Singapore, does not see a direct correlation between Covid-19 and RTOs, she concedes that there might be an indirect correlation. She says the economic repercussions arising from restrictive measures to contain Covid-19 have inadvertently impacted investor sentiment.

“Consequently, for companies that are seeking a listed status without an immediate need to raise new capital, an RTO can be one of the options which minimises market risk since it skips the roadshow process,” she adds.

TSMP’s Yuen Thio shares a similar view. “The stock markets seem to exist in a bubble that is insulated from the economic realities of Covid-19. Covid-19-driven low interest rates and a buoyant US IPO market have driven a lot of companies to consider getting listed. If they see an RTO as a quicker and more certain route to achieve this, that is important,” she says.

However, PwC’s Tham believes the surge in RTOs was the result of a “spillover effect” from the global and regional IPO boom amid the strong recovery seen in many stock markets. “I believe the Covid-19 pandemic is not the main driver of RTO volume, rather, it is more correlated to the record-fast recovery of the stock markets compared to a year ago,” he says.

Success after RTO?

For now, Chaswood, Fabchem, Jackspeed and ASA will need to obtain shareholder approval to complete their RTO. Axington and BlackGold will need to look for a new target acquisition if they were to pursue an RTO again. Meanwhile, LHH and Shanaya will need time to take advantage of the listed status for growth.

Dax Ng, LHH’s chief business officer, says the healthcare sector outlook is positive in view of the increasing ageing population, rising affluence as well as improved awareness in health issues. “We believe our financial performance for FY2022 to improve over that of FY2021 in view of these growth initiatives and in the absence of those financial effects relating to the RTO,” says Ng.

Looking ahead, LHH’s Tay notes: “Having successfully listed on the SGX, we are pleased with our first set of financial results which underscore the growth potential of and synergy among our medical business segments. Notwithstanding the challenges related to Covid-19, we are embarking on a clear growth strategy as a multidisciplinary healthcare services provider for the Asian region.”

LHH plans to double its team of doctors and primary healthcare footprint in the next three years and plans to expand its current suite of offerings, especially its family clinics that according to Ng, has seen an increase in footfall. As for expansion, the group will now focus on Singapore and look into regional expansion once the Covid-19 pandemic situation improves globally.

At Shanaya, the company is looking to expand its Kian Teck Facility, which has a daily waste handling capacity of 50 tonnes and an approved storage limit of 50 tonnes of waste. Shanaya intends to increase the capacity to collect, sort and treat a larger volume of waste.

In addition, the company also intends to progressively develop its Tuas facility, which commenced operations in May. The company plans to expand the facility’s waste management, treatment, and recycling services for a wider variety of waste. This includes the treatment of toxic waste, such as spent chemicals, solvents, oil sludge, oil waste mixtures and oily water, with its own in-house oil recovery plant, chemical treatment plant, and wastewater treatment plant.

Will the reinvigorated LHH and Shanaya prove to be a success? Wayne Lee, chairman and CEO of W Capital, says the success of any company after completing an RTO is mixed. He notes that Wilmar International is one of the most successful examples, thus far. In 2006, the agri-food giant was acquired by healthcare provider Ezyhealth through the issuance of 21.5 billion new shares at 6 cents each. Wilmar is now valued at around $27 billion.

However, not all companies have proven to be a success after an RTO. “There are failures as well,” he says.

Evolve Capital Asia’s Chua says the success of any RTO exercise depends on the quality of business or assets acquired. “Investors are savvy enough to evaluate the attractive growth profile of the business being acquired given our deep and established capital markets on SGX,” he says.

On the other hand, Deloitte’s Tay says a company’s post-listing success depends on its business fundamentals, ongoing investor relations initiatives to engage their investors and the macroeconomic environment.

Whatever the outcome, there would always be companies bold enough and willing to take the risk to open that RTO door to find out what’s on the other side.