Commentary: Pros and cons of Cosco’s proposed asset sale

Date: August 23, 2017

First published on Business Times on 23 August 2017

Move appears to be in the interest of shareholders but they need to ask questions about future plans at EGM

The shipping, offshore maritime, oil and gas sectors have been suffering the effects of a very daunting market conditions amidst an unprecedented and protracted industry downturn. The effect of the downturn has seen billions wiped out from the market capitalization of these companies. Some of these companies, once the darlings of market, much to the disappointment of investors have now sort court protection. While many are pursuing efforts to restructure their debt and improve their balance sheets, a few have already gone into or commenced liquidation. The effect of a liquidation destabilizes the confidence of investors.

While global trade and general economic environment is seen improving, companies in this sector are still not out of the woods. As companies begin restructuring and improving their balance sheets, recovery for many of them remains far off.

COSCO Shipping International (Singapore) or COSCO, listed on the SGX, has also felt the effects of the downturn in the industry. Its shipyards have had to contend with fewer orders and lower contract prices. This has resulted in a loss of $466.5 million for FY 2016 and $78.9 million for Q1 2017. The Company’s outlook is that it is not expected to improve with continued challenging business and operating conditions, which may even worsen.

Parent company’s plan

In order to better manage the situation and improve synergies, China COSCO Shipping, the parent company, has made a benevolent move by announcing plans to acquire COSCO’s equity interests in the following shipyards, COSCO, Nantong COSCO and Dalian COSCO. According to COSCO the purpose of the acquisition is for centralisation of the operations which would allow it to be more efficient and tap into the parent’s management and technical expertise, all aimed at improving the current situation. The proposal for the disposal of these loss-making businesses will mean that COSCO will exit these businesses and generate cash for future new businesses, substantially reduce the company’s debt position thus improving its financial position.

While this is an interested party transaction, the IFA has opined that the terms of the transaction are based on normal commercial terms and is not prejudicial to the interests of the minority shareholders and recommend accepting the offer. Nevertheless, shareholders should still read the IFA report set out in the circular to make an independent and informed decision.

Should there be a general offer, instead?

The assets currently represent about 80% of the company’s value; the sale of the shipyards to the parent would mean that the company would essentially exit from this business. This would substantially change the profile of COSCO. Given such a scenario, should there be a General Offer instead?

SGX Listing Rules do not mandate a General Offer in this situation. But it does require the company to seek shareholder approval for the sale of the assets as it is a related party transaction, as well as it represents a major part of the company. The rules also mandate that the company seek shareholder approval for the purchase of any new major business in the future. The company will continue to remain listed on SGX.

A general offer would mean lesser cash out lay for COSCO China as they are only obliged to buy over only 47%, which in my view, would have been an easier option. Having regard to our experience in the restructuring of China Aviation Oil (CAO), it is clear to me that the current proposal is a reflection of the Chinese political will to save a state owned company abroad. With the current proposal, COSCO China will inject the 100% value of the assets sold by COSCO Singapore to COSCO China, which amounts to RMB1.465 billion, all of which will be transferred to the Singapore entity’s account.

Important decision to make

Shareholders have an important decision to make. You can either vote for or against the proposal. But be mindful that the ship building and repairing industry is still in the doldrums and will take some time to recover. The company may also need enormous funds to continue. Will shareholders continue to support COSCO in such a situation by contributing to rights issues? Where will the share price be then?

SIAS views the proposal as a good opportunity for the company in Singapore. It has the chance to get out of a loss-making situation and seek better prospects to improve shareholder return. With China’s “one belt, one road” strategy, I am sure there are many opportunities open to the company in the near furture. Nevertheless, shareholders should ask the company’s plans moving forward and how they intend to maximise shareholder value at the coming EGM on 30th August, though the proposal by COSCO China appears to be in the interest of COSCO shareholders. The majority shareholder, COSCO Group, which is linked to the offeror cannot vote on this proposal. Only independent minority shareholders can vote.

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