Date: February 26, 2021
The Board of Directors
GuocoLeisure Holdings Ltd
c/o DBS Strategic Advisory
Institutional Banking Group
RE: Appeal on behalf of minority shareholders of GL Limited
Shareholders of GL Limited, have reached out to SIAS, highlighting their concern that the current offer price of $0.70 significantly undervalues their shareholdings in GL Limited , and they feel that the offer is not fair.
The offeror’s rationale for the proposed offer relying on the difficult operating conditions brought about by COVID, shareholders are not convinced that the offer is in the interest of minority shareholders.
“Not fair but reasonable” is the opinion provided by the appointed independent financial adviser (IFA), in the voluntary conditional general offer made by the offeror Gucoleisure Holdings Limited for GL Limited. Many shareholders, especially minority shareholders, have turned to SIAS as to how they should make sense of, and respond to this exercise.
Following our review and the feedback received, we believe that the concerns raised by the shareholders are legitimate and ought to be brought up for review. As this general offer does not require an extraordinary general meeting (EGM) to be convened, the involved parties need to take additional effort to protect the interests of minority shareholders and address the questions they have, for a smooth facilitation of this exercise.
To help shareholders understand the offer, below please find concerns and questions by shareholders:
1. Fairness of the offer price
The circular document released for the purposes of this privatisation exercise highlighted the premium implied by the offer price over various historical periods. The offer price of S$0.70 per share represents a premium of 25% to last transacted price on 14th January 2021; and premium of 28.2%, 33.8%, 28% and 9.5% over the VWAP per share for the one (1)-month, three (3)-month, six (6)-month and twelve (12)-month periods, respectively. That said, the offer price may not be that enticing to long-term shareholders, and when compared to recent period between 15th January to 8th February 2021 (being the announcement and last practicable date, respectively, where prices moved above the offer price to S$0.725).
The sentiment that the offer price of S$0.70 may be too low was shared by some market participants, including the appointed IFA – the case in point being the steep discount implied by the offer price to the computed using sum of the parts (SOTP) value per share, with the lower and upper valuation coming at S$1.14 and S$1.32, respectively. Similarly, a research note published by a local brokerage firm believes that GL Limited is worth at least S$1.16 per share.
At this juncture, on behalf of minority shareholders would like to ask the involved parties to comment on the fairness of the offer price. Further clarity on the rationale of S$0.70, i.e. how was the offer price of S$0.70 determined, is needed as well.
i) Can the involved parties comment on the fairness of the offer price?
ii) How was the offer price of S$0.70 determined by the offeror, i.e. what are the factors considered in coming up with the S$0.70 figure?
2. Possible undervaluation of assets
Many have opined on the possible undervaluation of assets held on GL Limited’s balance sheet. For one, the hotel assets, which make up 80.5% of total assets, have been valued through the cost (rather than the more commonly used, fair value) model. Under the cost model, assets are carried at cost less accumulated depreciation, which may not reflect the possible upside and appreciation in value over time – especially as most (12 of 15) of these assets are located in the prime Central London location.
Shareholders would like the involved parties to clarify on the assumptions applied for this valuation exercise, i.e. what is the extent of due diligence and sanity checks made by the company, in determining the validity of the valuations. For one, the revaluation exercise conducted by Savills have estimated and ascribed negative market value for 5 of the hotel properties valued, arising from the negative EBITDAs caused by COVID-induced short- and medium-term revenue falls. Shareholders feel that it is hard to justify putting a mere U$2.8 million value for a property located in Central London with a 148 years of lease remaining; the assumptions for Trafalgar Square Hotel and Hard Rock Hotel London remain in question as well.
iii) Can management and/or the involved parties give an assessment of the accuracy of the property valuations?
iv) Can management explain the assumptions used in the valuation of the company?
v) Also, can management provide an update on what is happening on the ground, e.g. operations, business landscape, sentiments?
vi) Have there been any changes made to the strategy and/or operations in view of the COVID pandemic?
vii) A negative market value means that GL Limited would have to pay a third party to buy the five properties. Is this actually true? Please justify.
viii) Can management provide documents or any kind of information from potential buyers that substantiate this? Moreover, even if the buildings are completely worthless, the value of the land itself being worth less than zero flies in the face of market reality.
ix) Can management provide documents or any kind of information from potential buyers that substantiate the US$2.8 million value of the property located in Central London?
x) It would appear that GL Limited’s assets have been valued either using the cost approach or the income capitalization approach. In our view, both these methods are inappropriate as these potentially undervalue the true value of GL Limited’s assets. Can management explain why it did not choose to use the sales comparison approach whereby GL Limited’s assets are valued using the actual transaction prices of comparable properties?
xi) Can management or Savills provide the value of GL Limited’s assets based on the sales comparison approach?
3. Worst is over
The Covid-19 restrictions have been easing. It was announced that all legal limits on social contact will be lifted by 21 June 2021. Whilst both the hospitality and energy sectors were once most impacted during the heat of the pandemic, it does seem that the worst may be over, on the back of (i) positive global inoculation programme, (ii) improving oil prices, even above pre-COVID levels, (iii) favourable news-flow in the UK, such as the end of lockdown by June; and smooth vaccination rollout, highest amongst the developed countries, and (iv) Brexit being a non-factor at this point. The rationale provided by the offeror, therefore, is not compelling. It appears that the improving economic situation has not been taken into account in the calculation of future EBITA/profit.
xii) Can the offeror reiterate the rationale for this privatisation exercise? In the interest of minority shareholders, do the involved parties think that this is the most opportune time for a privatisation exercise?
xiii) How critical is the privatisation exercise to GL Limited?
4. Determined to get it done
This is not the first time that an attempt has been made to privatise GL Limited; in 2005, despite an upward revision in offer price from S$1.20 to S$1.25 per share, it did not succeed. It is clear that the offeror is determined to get it done this time round; the offeror has built a substantial position in GL Limited over the past years; and raised its stakes further to 73.7% from the period of 15th to 19th January. It will take a much smaller margin for the offeror to successfully privatise and delist GL Limited.
Nevertheless, shareholders have been patient and are on a wait-and-see approach, hoping for an upward revision of the offer price. The IFA’s opinion of “not fair but reasonable”, coupled with the concerns raised in this statement, SIAS calls for the offeror to seriously reconsider to improve the offer price to reflect the true value of GL Limited.
SIAS calls on the offeror to address the above concerns and questions and publish the responses on SGXNet. SIAS also calls on the offeror to extend the deadline of the offer by 2 weeks, so as to give minority shareholders the time to understand the issues and concerns for the benefit of all stakeholders involved.
SIAS stands ready to facilitate communication between the offeror and the minority shareholders. In the interest of transparency, SIAS will release this letter to the media, so that all shareholders would be informed of this letter.
Founder, President & CEO