SIAS does not pick sides when calling for higher offer

Date: October 7, 2016

To the Editor
Business Times

We refer to an article in the Business Times on 4 Oct 2016, “SIAS should be more careful before picking sides”, by Kenneth Lim.

In respect of takeovers, the role of SIAS is to support the interests of minority shareholders. We do this also to ensure a level playing field between large corporates and less sophisticated investors and minority shareholders, especially for valuation issues. We carefully study the offer and the opinion of the IFA to provide guidance if the minority shareholders so need it.

The writer has given the impression that SIAS is not mindful of the rights of the offeror’s shareholders when requesting for a review upwards. What the writer has not highlighted is that it is the role of the Board and the senior management to ensure that whatever offer is made, it is in the best interests of the company and its shareholders.

The Board of the offeror owes a duty to act in the best interests of the offeror’s shareholders. Any offer or revised offer for the shares of the target company must be based on sound commercial reasons which the offeror’s board is accountable to shareholders of the offeror. SIAS does nothing more than to act as a sounding board for minority shareholders of the target company who have reflected their concerns to SIAS on any perceived unfair and/or unreasonable offer. This is the focused objective and mission of SIAS in these issues. Shareholders of the offeror who are unhappy with the terms of the offer or revised offer for the target company must first raise their concerns to the board. SIAS would of course be most happy to listen to any feedback or concerns raised by the offeror’s minority shareholders before taking any public position on the terms of any general offer or scheme.

With regards to the SIA offer for Tiger Airways, SIAS was approached by long term minority shareholders of Tiger Airways to relay their unhappiness on the offer. SIAS highlighted their concerns that the IFA recommendation did not take into account the long term Tiger Airways minority investors, who had stayed with the company through thick and thin. They felt this way because SIA was prepared to pay more for the Tiger shares to Temasek ($0.678), but is not willing to pay the same to Tiger minority to take it private. They also pointed out that SIA paid $ 0.565 to increase it’s stake from 40% to 55.8%. This was only possible because minority shareholders had earlier granted a whitewash waiver without making a general offer. It is also to be noted that the IFA report did not take into consideration these important factors.

In this regard, when SIAS made a call on SIA to improve it’s offer, SIA initially declined and only after some time, the board changed its earlier the decision. In championing the cause for one group of the minority shareholders of the offeree company by making a call to the offeror to improve it’s offer, it is not given that there will be an automatic positive response. The board of the offeror has to discharge its fiduciary duty to all shareholders, including minority shareholders, that by increasing the offer, it is not acting contrary to the best interests of its shareholders. The board is expected to weigh all factors especially the interest of its own shareholders before increasing the offer. SIAS has been given underserved credit by Kenneth Lim in suggesting that the offeror is relenting to our call because SIAS “has become a force to be reckoned with”. This gives no credit at all to the board of the offeror who have highly qualified industry experts who are also highly respected and enjoy high reputation in the market place.

No board, in discharging its duties to stakeholders, will risk making a frivolous decision knowing that they are fully accountable to their shareholders at the AGM nor simply to oblige SIAS. Minority shareholders of the offeror also have the right to convene an EOGM to seek an explanation from the Board for agreeing to the call for a upward revision of the offer, if it is not reasonable.

With regards to Halcyon’s offer for GMG, SIAS has called for a review of the offer based largely on the IFA’s recommendation that the offer is “unfair”. We also note with deep concern the following:

1. Sinochem International Corporation is part of Sinochem Group, a Chinese conglomerate owned by the Chinese government. Prior to Sinochem’s offer for Halcyon, Sinochem held some [51%] interest in GMG. At the close of Sinochem’s offer for Halcyon on 22 Aug 2016, Sinochem was the largest shareholder in Halcyon (66% shareholding) and indirectly controlled GMG. Sinochem also controlled the natural rubber assets which Halcyon offered to purchase from Sinochem.
2. At present, with the exception of Sinochem, there are no other substantial shareholders of Halcyon.
3. The CEO of Halcyon, Robert Meyer, has sold down his stake in Halcyon and currently only holds 4.23% of the firm’s shares.
4. Halcyon’s offer for GMG and Sinochem’s natural rubber assets are both unconditional as to acceptances.
5. In view of points 1-4, it can be inferred that Sinochem is the driving force behind the transactions involving GMG, Halcyon and Sinochem’s natural rubber assets.
6. The independent financial advisor to GMG highlighted significant pricing differences among the three transactions. The GMG offer Price/NAV (P/NAV) ratio is 0.45-0.89, the lowest compared to the P/NAV of 3.54 in Sinochem’s cash offer for Halcyon and the P/NAV of 1.64 in Halcyon’s offer for Sinochem’s natural rubber assets.

One wonders if there is any conflict of interest in Halcyon’s relatively low valuation of GMG, compared to Sinochem’s offer for Halcyon and Halcyon’s offer for Sinochem’s natural rubber assets. The magnitude of the valuation differences is substantial, so it definitely needs to be addressed.

The article also suggests that the combined entities can build scale to be a stronger industry player. Unfortunately, this scenario was not analysed fully in the IFA report and minority shareholders must also be aware of Halcyon’s debt levels, the risks and that it’s future cannot be certain. Therefore the IFAs conclusion that the offer is “unfair but reasonable” and that view of combined entities was not evaluated, is confusing to minority shareholder and the points of contention should be highlighted.

Sinochem, being a conglomerate, and Halcyon, being a listed firm with S$690m market capitalization, are institutional corporates with considerable resources with the institutional wherewithal to analyse all relevant numbers and intangible factors such as goodwill and increased market share post-offer. In comparison, the minority shareholders of GMG, who are less equipped financially, deserve clearer disclosures and a more comprehensive low-down on the value of the target company to enable them to make a more informed decision regarding their shares. SIAS will actively protect the interest of minority shareholders, both through greater education and championing their rights.

SIAS is respectful of the rights of all minority shareholders. If Halcyon’s minority shareholders feel the GMG offer is unfair to them, we welcome their feedback and will work to address their concerns. It must be noted that besides Kenneth Lim, there has not been a whimper from a single Halcyon minority shareholder to SIAS, to date, as they must be confident that the board will make the right decision for them.

The paramount interest of the minority shareholders will be the focus of SIAS. However, we act for our constituents only when they are disgruntled, with responsibility and reasons. Needless to say, in the case of Halcyon, the board will of course consider the interests of its own shareholders and need not worry about any suggest of SIAS “has become a force to be reckoned with”.

No credit is given to GMG’s minority shareholders for their ability to assess whether the offer is reasonable or not, nor are the minority shareholders of Halcyon helpless in deciding whether the offer is or is not against their interest.

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