Raiders, traders would be good for the market, but boards with backbone would be even better

Brierley patiently addressed every question I asked. But he kept his answers short, and wouldn’t be pinned down about his intentions. He insisted he was a long-term investor in Inchcape Motors, but made it clear that his position could change at any time. He refused to say what he thought shares in Inchcape Motors to be worth, but noted that the company had a huge amount of cash following the sale of its finance unit. Even with shares in Inchcape Motors trading at elevated levels, the cash on its books at the time was equivalent to almost 60% of its market value. On that basis, Brierley said its parent “could pay more” than what it had offered.

This interview with Brierley was the basis of a little story that ran in The Edge Singapore (Issue 001, March 4, 2002) under the headline “Ron Brierley says Inchcape’s offer too low”. Not long after, Brierley got his way. The offer for Inchcape Motors was raised to $2.70 per share, and the company was taken private.

To be honest, Brierley had caught me off-guard when he called. I had expected him to simply ignore me, or, at best, have someone in his office send me a written statement. Corporate raiders, arbitrageurs and short-sellers are often portrayed as being self-interested, opportunistic, disruptive and having little regard for the long-term objectives of a company or the welfare of its staff. So, they are naturally careful about what they say in public.

Indeed, in September 2004, when the New York-based Paulson & Co was amassing a significant stake in Neptune Orient Lines in an apparent attempt to resist an offer by Temasek Holdings at $2.80 per share, I had little success getting through to John Paulson himself. In the end, all I had to work with was an open letter from Paulson to the board of NOL, in which he called for the board to actively solicit competing offers.

“Stating that no other competing offer has emerged as an indication of the fairness of Temasek’s offer fails to recognise the reluctance of potentially interested parties to enter a competitive bidding process without the invitation of the board,” Paulson said, in one portion of the letter. “Unless Temasek makes a compelling offer, we feel that it is incumbent upon the board to actively solicit other potential acquirers to ensure that NOL shareholders receive full value.”

Paulson — who would become rich and famous for betting big on the collapse of the US housing market in 2007 — wasn’t as successful with NOL as Brierley was with Inchcape Motors, though. Temasek didn’t raise its offer price beyond $2.80, and Paulson eventually dumped the stake he had accumulated in NOL. Temasek held about 69% of NOL immediately after the offer expired, up from just over 30% before the offer.

The exploits of Brierley and Paulson came to mind while I was thinking about the seeming lack of resistance to a string of corporate deals over the past year that were obviously unfair to minority investors. The likes of Brierley and Paulson may well not be anyone’s best friend. Yet, when the boards do not act in the interest of minority shareholders, and regulators are at a loss to know what to do about it, traders and raiders of their ilk could be the only friends that small-time investors have.

Unfair offers

In particular, the willingness of such activist investors to take a more than 10% stake in a company to prevent a delisting negates the fear that often prompts investors to accept offers that aren’t attractive. In order for a company to delist voluntarily, at least 75% of its shares have to vote in favour of the move, and no more than 10% vote against the move.

In July last year, Hong Kong-listed Wheelock and Company announced an offer for its Singapore-listed subsidiary, Wheelock Properties, at $2.10 per share. The offer price was more than 20% above Wheelock Properties’ then-market price, but more than 20% below its book value of $2.60 per share as at June 30, 2018. At the close of the offer, the parent company had increased its stake in Wheelock Properties from 76.21% to 90.1%, just enough to ensure a delisting.

If an activist investor had grabbed a stake of more than 10%, the delisting could have been staved off. That might have emboldened other minority investors to hold out for a better offer or push for the company to unlock the value of its assets. As at June 30, 2018, Wheelock Properties had total assets of more than $3.25 billion, of which more than $854 million was in the form of cash. That was more than the $598 million of cash that Wheelock and Company would have spent to acquire the nearly 23.8% of Wheelock Properties it did not already own.

So, the parent company of Wheelock Properties obviously had the capacity to pay more than what it had offered. However, in the absence of an activist investor like Brierley, with a sufficiently large position and determination to press for a better deal, minority investors had to settle for the paltry offer of $2.10 per share.

Now, it looks like other undervalued companies may soon go the way of Wheelock Properties. On April 10, 2019, Indofood Sukses Makmur unveiled an offer for all the shares it doesn’t already own in its Singapore-listed subsidiary, Indofood Agri Resources (IndoAgri). The offer price of 28 cents per share is more than 33% above where the stock was trading at the end of last month, but more than 65% below the company’s net asset value as at end-2018 of IDR8,444 per share. When the offer was unveiled, IndoAgri’s parent and concert parties already held 74.52% of all its shares.

Separately, on March 20, Challenger Technologies unveiled a delisting proposal that will see minority investors receiving an exit offer of 56 cents per share. The offer price is 5.7% above the stock’s market price just before the offer was announced, but less than 10 times the company’s earnings for FY2018 of 5.64 cents per share. The offeror is a vehicle that is jointly owned by the Loo family that controls Challenger and a fund managed by Dymon Asia Private Equity. As it is, shareholders holding 78.64% of the company have provided undertakings to accept the exit offer.

Even taking into account IndoAgri’s poor financial performance recently, the offer price seems far too low, in my view. If the board and management of IndoAgri can’t get the assets to perform better, they ought to look into selling them to other plantation players and distribute the proceeds to the company’s shareholders. The poor performance shouldn’t be used as an excuse to short-change minority investors.

Meanwhile, at least one investor has said the exit offer for Challenger is too low. Pangolin Investment Management, which runs a fund that holds 2.94% of Challenger, has stated that the company could raise its dividend payout ratio to 100%, from about 50% in the past. Pangolin figures this would lift the stock’s fair value to $1.025. In addition, Challenger could pay out some $43 million, or 12.5 cents per share, of the cash on its books as a special dividend, according to Pangolin. “We strongly advise shareholders to reject this derisory offer during the upcoming extraordinary general meeting,” Pangolin said.

Nevertheless, in the absence of an activist minority shareholder willing to risk buying up a stake of more than 10%, it seems likely to me that both IndoAgri and Challenger will soon be delisted.

Boards with backbone

To be clear, I’m not suggesting that the presence of raiders and traders alone will result in minority investors getting a better deal. Or, that the demands of the likes of Brierley and Paulson are some kind of moral force in the market. A public-listed company’s shareholders — majority, minority, institutional or retail — are driven by little more than self-interest. In the end, it is the board that has to find a way to do right by all of them.

Yet, there ought to be more debate on what it means to act in the interests of minority investors. All too often, a corporate exercise is deemed to be acceptable if it immediately triggers a rise in a company’s stock price, and eventually garners sufficient support at a shareholder meeting. That’s clearly not enough. Indeed, as with Wheelock Properties last year, the recent offers for Challenger and IndoAgri have triggered jumps in their share prices. And, even if minority investors think they are being short-changed, they may well eventually vote for the offers because voting against the offers would essentially be voting for the stocks to fall back down.

So, what does genuine board independence look like? Is it realistic to expect a board to solicit alternative offers, as Paulson urged the board of NOL to do back in 2004?

One episode that comes to mind was the battle waged by Thai billionaire Charoen Sirivadhanabhakdi over the course of 2012 and into 2013 to gain control of Fraser and Neave. The story began with Charoen’s corporate vehicles buying a 22% stake in F&N at $8.88 per share from Oversea-Chinese Banking Corp. They continued accumulating F&N shares in the market, and eventually launched an offer for the whole company at $8.88 per share.

However, the board of F&N didn’t immediately recommend Charoen’s offer. Instead, they encouraged a competitive situation. A consortium led by OUE, which had been promised a “break fee” of $50 million by F&N, made an alternative offer at $9.08 per share. A lengthy stalemate ensued, until Charoen finally raised his offer price to $9.55 per share, which valued F&N at almost $1 billion more than his original offer — not a bad return on $50 million.

These efforts probably didn’t endear the board of F&N to the new controlling shareholder, and they must have assumed that they would be promptly replaced once the takeover battle was over. But the gumption they displayed ought to be a benchmark of sorts for every other company that is the subject of an offer.

This story appears in The Edge Singapore (Issue 878, week of Apr 22) which is on sale now. Subscribe here