Cash-flush buyers taking billions off Singapore bourse via privatisations

Privatisation has picked up pace this year, and is likely to continue, as acquirers - strategic investors, private equity firms and entrepreneurs - continue to target listed corporates.

There have been about a dozen ongoing and completed takeout offers this year, mostly concentrated in the unloved small- to mid-cap space that is struggling with industry disruption, diminishing free float, and poor trading interest.

Their aggregate market cap adds up to close to S$5 billion - albeit still a stretch to beat 2018's figure, which included Global Logistic Properties' record S$16 billion privatisation deal.

Atin Kukreja, CEO of financial advisory firm Rippledot, cites low valuations, poor trading liquidity, strong corporate balance sheets, and cheap funding as the prime drivers behind the trend.

"Liquidity and trading volume in the equity market is low, but they are high in the debt market. With the interest rate environment still benign, acquirers are able to find opportunities to finance takeovers." He believes the momentum can continue for the rest of this year as long as the US Federal Reserve remains dovish, barring external shocks.

"There are three main sets of buyers in the market, each one equally potent. The first is strategic investors who might be acquiring to expand. Thanks to the low interest rate environment, corporate balance sheets have been quite strong in the last five to eight years, which explains the level of M&A (mergers and acquisitions) that we see taking place, not just in our market, but globally."

Examples include Japanese electronics retailer Nojima Corp's offer for Courts Asia, and Japanese engineering group Kyowa Exeo's offer for DeClout. In both cases, the listed local companies are seen as platforms with complementary businesses that the acquirers can tap to expand into the region. "Second is private equity," says Mr Kukreja. "Private equity liquidity is at an all-time high and investment activity is on the rise. Asia-Pacific focused private-equity dry powder, mostly comprising Asia-focused global and regional funds, exceeded US$225 billion in 2017, more than twice 2010 levels. This is despite record levels of investment activity, with deals by Asia-Pacific private equity towering at US$159 billion in 2017.

"The third is entrepreneurs themselves who had earlier listed their companies, and are now considering taking them private, as there is illiquidity in the stock and they find prices undervalued."

The same goes for parent firms taking back their subsidiaries, such as: Indofood Sukses Makmur and Indofood Agri Resources, Kingboard Laminates Holdings and Kingboard Copper Foil, and Keppel Corp and Keppel Telecommunications & Transportation.

While the privatisation trend in Singapore year-to-date has been sector agnostic so far, spanning commodities, chemical, retail, electronics, IT and telecommunication, some sectors that private equity money seems to be zeroing in on include healthcare, education, consumer, fast-moving consumer goods, food and beverage, logistics, professional services and advanced manufacturing, says Wayne Lee, chairman and CEO of the newly accredited Catalist full sponsor, W Capital.

Within the new-economy sectors, he also finds private money interested in blockchain, e-commerce, robotics, fintech, edutech and medtech.

"If you look at the US$358 billion in private equity funds that has been raised globally last year, 63 per cent is allocated to buyout funds, with a huge increase seen in Asia-Pacific markets.

"M&A valuations are reaching a peak. Transactions by buyout firms are at 10-17 times Ebitda because there's too much hot money chasing limited good quality deals."

Among rationales listed in offer documents, acquirers commonly cite increased compliance requirements which bog down management and detract them from growing the business, as well as listing costs, lack of trading liquidity and no medium- to long-term need to raise funds from the capital market, as reasons to delist.

Terence Wong, CEO of fund management company Azure Capital, says that "very cheap" stock valuations, compared to the region and globally, help to attract private money and motivate business owners to buy back their firms from shareholders who "cannot appreciate" the company's value.

They also make it easier to satisfy minority shareholders who are looking for a way out from shares whose prices have been languishing for some time.

Business owners and controlling shareholders have also cited intensifying competition and industry disruption as a motivation for taking their companies back.

The offeror for telco M1, a joint venture between Keppel Corp and Singapore Press Holdings (which owns The Business Times), has said that the impending launch of a fourth mobile network operator and new mobile virtual network operators in Singapore threaten M1's operational performance.

Keppel and SPH said they seek to take the telco through "a combination of transformational efforts which are expected to take several years", during which time dividends could be affected as capital will be spent on the company's transformation efforts. The JV thus encouraged M1 shareholders who are not prepared to bear the risks to accept the offer and exit.

Similarly, the offeror for Challenger, a joint venture between the founding Loo family and Dymon Asia Private Equity, also touted the offer as an exit opportunity for shareholders as dividend payouts may get affected during its restructuring exercise.

"The company (Challenger) is facing challenges due to weak retail sentiment and industry disruption, and may have to implement changes to its business to navigate the challenging retail environment", it said, citing market saturation, competitive pressures, and the threat of e-commerce, which have caused the firm's revenue to decline consistently over the last five years.

Mr Wong says that it helps for the company to get out of public scrutiny and be unencumbered by the demands of listing compliance when it is undergoing major changes. Citing Temasek Holdings' privatisation of SMRT three years ago, he says the troubled transport operator needed space to revamp itself while its earnings and staff morale were suffering. Besides, not all shareholders are in for the long haul and are willing to tide through the pain.

"So it's a right move to get out of the market first, do whatever you need to do, and come back stronger and relist at better valuation," he says.

Relisting is a possibility. History buffs may recall that Courts Asia was first listed on the Singapore stock exchange in 1992, before it was delisted by a private equity consortium led by Baring Private Equity Asia in 2008. It was relisted in 2012 without its loss-making Thai operations, and is now back in privatisation play with Japan's Nojima making the latest offer.

Maybank Kim Eng's regional head of investment banking, Rajiv Vijendran, believes that the trajectory for the rest of this year is not likely to change for privatisations.

Private equity firms will continue to see something they like about the business or valuation of listed companies and believe that they can transform them for the better.

"Once privatised, they may restructure, add capital expenditure, grow the business, maybe sometimes even do 'bolt-ons', meaning buy other companies to add to the business, and typically after five years, they will look for an exit, either through a trade sale to someone complementary in the business like another private equity firm, or an initial public offering."

Liu Jinshu, research head at Tayrona Financial, agrees, noting that global equity markets have peaked. "There will probably be a downturn in the next 24 months and when there are low valuations, that's where you'll see privatisations occurring."

Some in the market have said that the regulator's proposed changes to voluntary delisting rules to protect minority shareholders - specifically whether controlling shareholders should vote, and whether exit offers are too low - may hasten more delistings to speed through the pipeline before the stricter rules take effect.

But voluntary delisting - just one of three kinds of takeover mechanisms - made up less than one fifth of privatisation transactions in the listed universe this year, which suggests that the expected rule change might not be a very major driver.

Lee Meixian

17 April 2019