Tuesday, September 05, 2006

Privatisation / M&A In Malaysia

There was a report in Business Times stating that there was RM28 billion in market cap to be taken off the stock market if all the privatisation deals announced in 2006 were to be completed. The deals cited include:
- Amcorp RM883m
- Southern Bank RM6.7b
- Koa Denko RM55m
- Johor Port RM398m
- Guocoland RM291m
- Malakoff RM9.3b
- OYL RM7.6b
- UBS RM98m
- UDA RM529m
- Worldwide RM304m

"Where Is Ze Moola" (you can access his credible blog by clicking on the link on the right column) wrote in his blog: "... the privatisation and the subsequent delisting of the listed subsidiary, this one i really dun like at all. It's just totally unfair to the minority shareholder and it makes a total mockery of the whole stock exchange. Listed Companies should not be given the approval so easily to privatise their listed subsidiary company in which the general investing public is forced or threatened with the issue of delisting. And as mentioned earlier once the company is delisted this offers the investor no transparency rights at all. So when a listed company is able to list and delist their subsidiary companies as per their whimps and fancy this would make a total mockery of the stock exchange. And what about the general offer price for the minority shareholders stake in that listed company? Would the minority shareholders get an offer that is fair or would the minority shareholder be placed in a disadvantage position? Would the premium offered over the existing share price to adequately compensate the minority investors? If no, this ultimately means that the minority investors would never be given a chance to being adequately compensated for the permanent withdrawal of a good investment opportunity. And if this is the case, then this would contradict the government's plan to woo more investors into Bursa Malaysia cause investing would have indeed turned very unattractive, a game which is very biased against the investing public.."

My take:
1) Differentiate first between privatisation and M&A, when it comes to Southern Bank (which will be absorbed under Commerce Group) and Malakoff (will be under MMC Corp) - hence those companies are not missing from the market cap of listed companies, just under a different banner
2) Real privatisation and taking of the company from being listed totally will have the impact of depriving investors from participating in the future growth of the company. Examples include Worldwide and OYL (well, in OYL's case, you can still invest via Daikin Industries)
3)For the first group, its not a big issue actually, the minority shareholders usually get a premium to market price plus they can usually opt for cash or shares in the parent company doing the acquisition, so the actual exposure to growth is still there, and any undervaluation of the acquired company would still be within the acquirer company
4) For me, the issue is when a company is completely taken off the block. For example Worldwide, many minority shareholders buy for the long term as its NTA is anywhere from RM4.00 - RM5.00 while the market price traded usually closer to RM2.00. Naturally its a no-brainer for controlling shareholder to privatise the company especially with excellent cash flow. Merchant bankers worth their salt would be scrambling to lend money to the owners to do the buyout and get healthy advisory fees in return in an almost risk free scenario. The G.O. at RM3.50 seems rich compared to the market price for the last 12 months, does that mean minority shareholders should be appeased? The straight forward answer is NO. M.I.s invested for the long term to realise the full value of the company, even though RM3.50 is a huge premium to average market price, we do not know M.I.s entry price or investing objectives. While we cannot expect the controlling shareholder to offer RM5.00, we do expect a closer price to underlying value of the company.
5) Part of the problem of growing privatisation is that the market does not value shares properly. Worldwide has been trading way below NTA for such a long time, and there are tons of other shares like that (including Landmarks till the tussle for control recently). Hence the rise of privatisation is a VERY GOOD TREND as it will encourage more investors to seek out mis-priced stocks, and it will also encourage more controlling shareholders to issue G.O.s to take undervalued companies private.
6) If you can find 10 stocks trading 30%-40% below NTA, we still have to be careful as not all are candidates for privatisation. Cash flow is a prime consideration, it must be good. Then the NTA must be mostly in realisable state or more like current assets rather than hard-to-convert assets (such as plantation lands). We also have to look for potential catalysts, no point loading up 10 undervalued companie cause you could be holding for 5 to 10 years before anything happens. All stocks move only when we can identify catalysts or trigger factors. For example, why bother buying Landmarks at RM1.00 when nobody is doing anything, you can start when they started doing the REIT on Sungei Wang Plaza, you then can really load up when Syed went in as the prospects have changed enormously by then.

So, the SC and Bursa have to be careful when listed companies are taken off completely from the exchange, need to ensure M.I.s are not compromised. This drives at the very basic objectives of a capital market/exchange - you have a stock market to allow companies to raise capital and to allow investors to participate in the growth of the companies. When companies are taken off, make bloody sure the small investors are not screwed. That's because in deciding for privatisation, the deal hugely favours the controlling party already - hence someone must look out for the long-suffering small tenacious investor.

6 comments:

zentrader said...

Unfair privatisation play maybe the reason for Terbrau heavy drop?

Salvatore_Dali said...

Don't think so, Tebrau's drop is due to no follow through from leading syndicates on the stock as a lot of Tebrau changed hands at 55 - 62 sen. Looking at Iris, Mobif and Farm Best, just some syndicates deciding to opt out and go for holiday instead. It drops like a rock because there is no one taking care of the counter now.

zentrader said...

TQ for your analysis. I think maybe CMY wanted to wash out weak players. That's all.

Salvatore_Dali said...

To be fair to CMY, I don't think he was involved anymore. He was initially but apparently he had a look at the site and was not impressed with Tebrau's landscape (a lot of swampy areas). There was a lot of off market transactions for the last month or so at 55-62 sen, that looked suspicious with no strong syndicate move up north for Tebrau during that period.

zentrader said...

No wonder the price also very swampy one. :(

Moola said...

Sal,

WOW! Many thanks for featuring me on your blog.

Wrote something more on this isssue on my blog. It was rather longish so I decided to post on my blog instead.