Does ARA’s Scheme of Arrangement make sense?
Date: 16 March 2017
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There are many reasons for a company to be listed on a stock exchange. One key reason is to be able to tap public funds as and when extra capital is needed for expansion and growth. Beyond the initial public offering phase, listed companies can continue to raise public funds through various methods, such as preference shares, rights issues, retail bonds or perpetual securities. Private placements to institutional investors are also a viable option to raise additional funds. In addition, publicly-listed companies tend to enjoy better financing terms when seeking bank loans, as they are perceived to have higher standards of corporate governance, financial discipline and management prudence, as compared to privately-held companies.

Therefore, a growing company, which is constantly seeking funds for expansion, would be able to reap the value and benefits of being listed, as the stock exchange provides a ready source of investors as and when the company requires cash for expansion. Investors who believe in the company’s growth potential will continue to participate in such cash calls, hoping that their investments will pay off in the long term, in the form of future dividends or share price appreciation.

However, as we have seen in some recent privatisations, the benefits of being listed on a stock exchange are no longer relevant for companies that reach a certain size or a particular stage of development.

Ron Sim, the founder of the homegrown OSIM, has acknowledged that being listed has some drawbacks. For example, before embarking on a new initiative or project, he had to consider all stakeholders and their concerns, as well as evaluate the short-term impact on quarterly results. This hampered the entrepreneur’s style and stifled the company’s growth. In order to fast-track OSIM's growth strategically and opportunistically, Mr Sim made an offer to acquire all OSIM shares that he did not own. OSIM was delisted from the Singapore Exchange in August 2016.

In the case of the proposed privatisation of ARA Asset Management, the real estate fund manager believes that its growth is highly dependent on its ability to raise a huge amount of capital efficiently. In order to further its growth, ARA requires a substantial amount of capital to make strategic co-investments into existing and new funds, as well as make opportunistic acquisitions. ARA founder John Lim and controlling shareholder Straits Trading and Cheung Kong Property, have therefore entered into a partnership with private equity firm Warburg Pincus and AVIC Trust, to form a consortium to privatise ARA via a scheme of arrangement, at a scheme price of S$1.78. By securing the long-term commitment of these two partners, ARA hopes to be able to operate more nimbly and efficiently in achieving its growth objectives.

Despite the merits of the privatisation case, some shareholders may feel that they have been deprived of the opportunity to participate in the company’s long term growth, or that the scheme price is too low as they believe that ARA is worth much more.

In order to help shareholders make an informed decision, I will discuss a few points in greater detail:-

Constant need for capital for long term growth

Since its establishment in 2002, ARA has over time developed increasing investment and asset management capabilities over large-scale properties in multiple asset classes across Asia Pacific.

Unlike other traditional real estate players with a significant value of fixed assets on their balance sheet, ARA’s debt headroom is limited by its asset light business model. Therefore, ARA will inevitably need to undertake equity fund raisings from time to time to maximise the scalability of its business model in the long term. In November 2015, ARA carried out its first capital market fund raising since its listing in 2007 through a S$152 million rights issue. The proceeds were used for strategic investments and seed capital for its existing and new funds it manages.

While this will tide ARA through the next few years, it will not be a sustainable solution for the company in the long run, as public fund raising is not only highly subject to market conditions, but also very costly. More importantly, it may result in a dilution of shareholders’ interest in the long term.

ARA shareholders will need to ask themselves, are they prepared to participate in the company’s cash calls in the future, in order to see the company through its next stage of growth? If no, are they willing to accept the fact that their stake will be diluted overtime?

Is the scheme price fair?

In any privatisation or takeover situation, minority shareholders are most concerned about whether the price offered is fair. It is natural for shareholders to seek higher offer prices, especially if they had originally invested at a higher price. However, they must also understand that share price fluctuations are a norm of the stock market, and there are always risks associated with any investments. Naturally, one would hope for the stock they invest in to appreciate over time, based on the company’s earnings potential – in a perfect market, this would be the case. But in reality, this usually does not happen and most companies do not trade at value, as share price is subject to a confluence of multiple factors that may or may not be directly related to the company’s earnings potential or fundamentals.

For ARA’s proposed privatisation, as stated in the scheme document, the scheme price represents fair premiums of 43.9% over the 12-month VWAP and exceeds the highest closing price of ARA shares since May 2014. The scheme price also implies an EV/AUM, EV/EBITDA and P/E of 5.0%, 17.5x and 20.7x respectively, which are higher than the company’s historical averages.

I have always highlighted that shareholders should refer to the opinion of the Independent Financial Adviser (“IFA”) on the price. The board of ARA has appointed Deloitte, as the IFA to opine on the scheme. The IFA is of the view that the financial terms of the scheme are fair and reasonable. The independent directors of ARA concur with the IFA’s recommendation and have recommended that ARA minority shareholders vote in favour of the scheme. It is also noteworthy that one of the major institutional investor of ARA, Franklin Templeton, has given an irrevocable undertaking to vote for the scheme.

A Scheme of Arrangement is also much better suited for that than a General Offer. This is because a Scheme of Arrangement has a binary outcome. Simply put, it either succeeds or fails. Retail shareholders have an opportunity to cast their vote and decide whether they want to sell their shares or not and be part of a collective decision by the general body of shareholders. If the vote is successful, ARA will be delisted from the Singapore Exchange. If it is not, ARA will continue to remain a listed company with no change in shareholding. In addition, a Scheme of Arrangement affords greater protection to minority shareholders as the overall process is overseen by the high court to ensure minority interests are protected. It is important to note that the rollover shareholders, namely Mr John Lim, Straits Trading and Cheung Kong Property cannot vote.

Given the low trading liquidity of the ARA shares, ARA minority shareholders may wish to consider that this is an opportunity for them to realise their investments through the scheme at an attractive valuation, without incurring any brokerage fees.

Conclusion

It is inevitable that shareholders will mourn the departure of a well-managed company like ARA from the bourse, especially in a turbulent period where we have seen multiple delistings last year. However, ARA sees the privatisation route as the only way for it to fully maximise its growth potential, which will be difficult to achieve as long as it remains listed.

Some may agree that the privatisation represents a win-win situation for both the company and the shareholders, with the company attaining its objectives to achieve greater things, and the shareholders given an opportunity to exit at an opportune time, at a fair and reasonable price. However, some may disagree and decide to vote against the scheme, hoping for a better offer in the future, if there is any.

John Lim and his Consortium partners have indicated that the scheme price is final and they will not be able to make another offer for at least 12 months, if the scheme does not go through. Shareholders should consider the fact that ARA share price is currently being supported by the scheme price and may fall below the current level if the scheme is unsuccessful.

It is, therefore, important for shareholders to rationally evaluate the scheme based on what is on the table now, what the future might look like, and whether the decision is in line with their own risk appetite and investment objectives.



David Gerald
Founder, President & CEO
Securities Investors Association (Singapore)