SINGAPORE (June 24): As an investor, I tend to look at corporate deals from the perspective of what it immediately means for a company’s shares. So, when CapitaLand announced its acquisition of Ascendas-Singbridge from Temasek Holdings in January, the aspect of the transaction that jumped out at me wasn’t that CapitaLand was expanding its footprint into new geographical markets and gaining exposure to properties that would benefit from “new economy trends” like e-commerce. Instead, the relative valuation at which CapitaLand had proposed to acquire Ascendas-Singbridge from Temasek and the manner in which it would fund the deal seemed much more important.
To cut a long story short, CapitaLand expects the transaction, which is scheduled to be completed by the end of this month, to be marginally accretive to its earnings per share but dilutive to its net asset value (NAV) per share and leave it with significantly higher gearing. The one saving grace was that CapitaLand’s top executives seemed confident that minority investors would not have to cough up any capital to fund the deal and could expect their dividends to be unaffected by the transaction. That is what I understood CapitaLand CEO Lee Chee Koon to have said when I watched a video of the briefing held immediately after the deal was unveiled.
However, if minority investors were hoping for confirmation of CapitaLand’s intention to maintain its dividend per share in the circular to shareholders two months later, they would have been disappointed. That document only went as far as saying: “CapitaLand has a policy on the payment of dividends. Barring unforeseen circumstances, CapitaLand’s dividend policy is to declare a dividend of at least 30% of the annual sum of operating profit after tax and minority interests, portfolio gains or losses and realised revaluation gains or losses (cash Patmi). The dividend policy of Capita Land is not expected to change as a result of the proposed transaction.”
CapitaLand’s communications people tell me that the CEO’s comments in January related specifically to the company’s dividend policy and not its future dividend per share. I was also told that CapitaLand’s dividend of 12 cents per share for 2018 was equivalent to 40% of its so-called cash Patmi. My purpose in bringing this up isn’t to suggest that CapitaLand will not be able to sustain its dividend per share. On the contrary, I am quite certain that it will have the capacity and motivation to pay at least 12 cents per share for 2019 and beyond. So, it seems strange to me that CapitaLand didn’t make this clear in its circular to shareholders.
These documents are a cornerstone of the disclosure-based market system, and they ought to contain relevant information expressed in a manner that enables investors to make decisions that are in their own best interests. All too often, however, these documents are couched in impenetrable legalese and peppered with information presented in a way that might mislead some investors and cautionary statements that sound like veiled threats.
Then, there is CapitaLand’s circular to shareholders, which may have left some investors unnecessarily guessing about the company’s future dividend payouts. If the acquisition of Ascendas-Singbridge proves to be accretive to the enlarged CapitaLand’s earnings per share, and the company meets the deleveraging targets detailed in its circular, it’s hard to see why the group wouldn’t have the capacity to maintain its dividend per share. And, surely CapitaLand’s board would want to at least maintain the dividend, if only to demonstrate that the transaction is paying off despite the company suffering some dilution to its NAV per share.
It would, of course, be very unwise for a company to make promises that it might not be able keep. And, investing is about taking risk. Yet, companies involved in mergers and acquisitions routinely provide the pro forma financial effects of their deals on their earnings and NAV per share. CapitaLand provided exactly these pro forma calculations. CapitaLand actually also provided estimates of the impact the transaction would have on its cash Patmi in its circular to shareholders and presentation slides. Why did it not go a little further and relate that to its capacity to maintain its dividend per share?
Could it simply be that the bankers and lawyers who worked on the deal were not thinking about CapitaLand’s shareholders? Was it a case of there just not being a box for them to tick?
Making sense of bald facts
After writing about a number of corporate transactions and delisting exercises over the past year and listening to the viewpoints of various speakers at the SGX Regulatory Symposium 2019 three weeks ago, it seems to me that there is room for improving the manner in which information is disclosed to investors. In my view, documents related to these transactions contain too much raw information and too little explanation of what the information actually means for investors.
In particular, announcements related to general offers usually include boilerplate statements on the possibility of the company in question losing the necessary shareholding spread to remain listed, and the conditions under which shares held by remaining minority shareholders could be “compulsorily” acquired. But investors are left to figure out what it all means for them.
Case in point: the offer for IndoFood Agri Resources. Regular readers of this column will know that I have grumbled about the offer price being too low. The offer price has since been raised to 32.75 cents per share (after dividend payment), but I still think minorities aren’t getting a good deal. Yet, I imagine most investors probably wouldn’t want to be left holding shares in a company that loses its listing status. Is there any actual risk of this happening? What options do minority investors have to avoid getting stuck? These are basic questions that the documents related to the offer do not answer — at least, not in plain English.
Instead, they present bald facts without useful context. Shareholders are informed that the offer is conditional upon the offeror and its concert parties ending up with more than 90% of IndoAgri’s shares. The documents further state that the offeror will have the right to “compulsorily” acquire shares held by dissenting shareholders if valid acceptances for not less than 90% of IndoAgri’s shares are received, other than the shares already held by the offeror. Dissenting shareholders also have the right to require the offeror to acquire their shares at the offer price once the offeror ends up with more than 90% of IndoAgri’s shares, but they would have seek their own independent legal advice.
The documents state that upon announcement that the level of acceptances has brought the offeror’s holdings above 90%, trading in IndoAgri’s shares might be suspended. In order to remain listed, IndoAgri needs to have at least 10% of its shares held by 500 shareholders who are members of the public. The documents add that the offeror has no intention to satisfy this free float requirement and will seek a delisting of the company. The documents state in bold print: “Shareholders should note that even if the free float requirement is not met, the offeror may not be able to exercise the compulsory acquisition right if it does not achieve the compulsory acquisition threshold.”
Minority investors who have digested all this information may well feel pressured to accept the offer even if they aren’t happy with the price, for fear that they could end up holding shares in an unlisted company. I’m not discounting this risk, but acting in haste only makes it more likely that this low-ball offer will succeed. In my view, minority investors should wait to see if the offer garners sufficient acceptances to become unconditional, which is when the minimum free float requirement would become an issue. At that point, minority investors can decide whether to accept the offer, with the knowledge that the company is definitely headed for delisting. My bet is that the offeror will give everyone more time to respond if the offer eventually becomes unconditional. The closing date for the offer is currently June 25.
Of course, investors shouldn’t take advice from an unqualified observer like me. Indeed, it ought to be the responsibility of IndoAgri and its advisers to disclose all the relevant information in the proper context. Minority investors should be not be unnecessarily frightened into accepting an offer that isn’t fair and reasonable.
Boards should take lead
This brings me to the topic of independent financial advisers and the corporate boards that rely on their work to determine if a deal ought to be recommended to investors. The advice of an IFA to the board is closely read by investors like me, because they provide a wealth of information on how a proposed corporate transaction compares to similar deals. But there are lots of shortcomings in the comparisons.
For instance, this column noted last week that the offer for Challenger Technologies is being partly justified on the basis that the offer price represents an attractive premium to the company’s book value, even though it wasn’t made clear why book value is a relevant financial metric for the company. As a retailer, Challenger doesn’t own vast amounts of hard assets. Most of its assets at any given time are likely to consist of inventories and trade receivables. Moreover, while price-to-book value is among the valuation metrics used to compare Challenger to companies with supposedly similar businesses, there was no mention of the return on equity of any of these companies.
In my view, IFAs could add more value if they delved deeper into the comparisons they make and provide some analysis on which valuation metrics make the most sense for a particular company. This is easier said than done, of course. IFAs face the same basic conflict of interest as auditors and valuers. They are hired to judge a transaction that the company itself is probably already predisposed to doing. In the end, it is the company’s board itself that has to take the lead in ensuring that their disclosures do more to clarify than confuse and are not just a box-ticking exercise.
