Date: May 30, 2023
Dear Mr Fuganto Widjaja and Members of the Board,
SIAS published an appeal to Golden Energy and Resources (GEAR) Limited on its exit offer on 1 March 2023, urging the company to improve its exit offer as GEAR seeks to carry out a distribution of GEMS and the privatisation of GEAR.
Following a meeting with GEAR’s representatives on 6 March 2023, SIAS followed up with a press statement on 9 March 2023 emphasizing the importance of making clear the distinction of the two corporate actions.
Disappointingly, the IFA has conflated the two corporate actions despite SIAS’ highlighting this specific concern at the meeting with GEAR. The IFA has issued a “fair and reasonable” opinion. Clearly, SGX RegCo’s reminder to the IFA regarding the utilization of appropriate valuation methodologies and the necessity for analysis supported by reasonable grounds and assumptions capable of withstanding scrutiny has seemingly fallen on deaf ears.
Overall, the long-drawn privatisation exercise is yet another example of a flawed process of the appointment and oversight of the IFA, as highlighted recently by SIAS in a commentary (“Privatisation offers too often a dilemma for shareholders”, ST, 27 March 2023).
BT’s strong-worded article, titled as “Golden Energy’s delisting: IFA opinion is faulty” (BT, 29 May 2023), further criticised the approach by the IFA. BT has pointed out that the IFA has, on no sound grounds, reduced the value of the GEMS DIS from 6,500 rupiah to “3,773 to 4,277”, a reduction by as much as 42%. This is exactly the reason why SIAS had, at the onset, cautioned the IFA against the conflating of the two corporate actions. Consequently, the IFA’s SOTP analysis for GEAR has been reduced from $1.104 to $1.041.
To set the lower bound in the IFA’s estimate of the range of values of GEAR, the IFA then introduced a new valuation metric – Enterprise value to trailing twelve-month (TTM) EBITDA. SIAS questions this approach as companies are too different to be generalised this way, especially one that is going private (and there being no chance for further price discovery in the future). In addition, the IFA applied its discretion and pre-selected three out of eight Indonesian comparable companies. An Indonesian company with EV/TTM EBITDA of nearly 15 was excluded, perhaps rightly so, but another comparable company with 0.44x EV/TTM EBITDA was then included by the IFA. The latter, being one-fifth the size of GEAR, was selected by the IFA which resulted in lowering the EV/TTM EBITDA ratio. So many more questions can be asked of the IFA. For example, how were the TTM EBITDA calculated and are these audited financial results? How does the market capitalisation of the Selected comparable companies, which ranged from USD354 million to USD6.05 billion, impact the multiple? There are simply too many judgement calls made that only prompts further questioning of the IFA’s approach.
Lastly, SIAS acknowledges that there are many ways to value companies and no single method will be met with universal acceptance. However, the IFA seems to have placed too much emphasis on EV/TTM EBITDA which set the lower bound. Typically, investment bankers use a “football field” valuation approach which shows all the different methodologies and the ranges of valuation used to establish the common ground. This then establishes a price range that is more widely acceptable based on the different valuation approaches. Doing so should allow the opinion of the IFA to “withstand scrutiny”.
(See example here: https://fincyclopedia.net/investment-banking/v/valuation-football-field or here https://cdn.corporatefinanceinstitute.com/assets/football-field.png)
Clearly, SIAS feels that the IFA has not met the expectations set specifically by SGX RegCo. The opinion does NOT withstand scrutiny. SIAS calls upon the IFA to incorporate more valuation methodologies in its analysis leading up to its opinion and to justify any judgement calls made in the process.
Finally, at the end of day, when asked to vote, the mum-and-pop investors would likely be overwhelmed by the 701-page circular that is filled with financial jargons and independent qualified person’s reports. One might feel that the extremely thick circular would end up confusing minority shareholders, instead of convincing them.
SIAS will frame the offer for shareholders as two simple decisions:
1st Offer:
(a) GEMS: GEAR, the SGX-listed company, wants to distribute its GEMS shares to its shareholders and GEAR has offered to buy it back at 6,500 rupiah per GEMS share. The revised GEMS cash consideration will be $0.792 per GEAR share. SIAS has no issues with the proposed DIS and cash alternative of GEMS.
Recommendation : Accept.
2nd Offer:
(b) Exit offer for GEAR (excluding GEMS): The SOTP for the remaining of GEAR (without GEMS) is valued by the IFA at $0.567 with Stanmore contributing 90% of the value before accounting for debt at the company’s level. The exit offer for GEAR means that the controlling shareholders want to buy that stake in Stanmore and other smaller assets from minority shareholders at $0.181 per GEAR share. This is at a 68% discount to the SOTP value.
Recommendation: Reject.
As the resolutions require 75% approval from minority shareholders, this is a golden opportunity for minority shareholders to pool together their resources to make their voices heard. With the offeror group abstaining from voting on both resolutions, minority shareholders will need to gear up for the big day and make their votes count, either in person or by proxy.
Unfortunately, the company has chosen to make the two resolutions inter-conditional on each other. Should minority shareholders reject the exit offer, GEAR will remain on SGX holding on to its valuable Stanmore stake along with GEMS. After months of hard work, shareholders go back to square one.
David Gerald
President and CEO
SIAS
Reply from GEAR to SIAS Press Release on 30 May 2023
