Privatization Gaining Momentum – Junk Stocks Left





May 18 2007
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Just what is happening to the Malaysia stock market? One after another listed company is being taken private. First it was the biggest mobile service provider Maxis Communications Berhad (KLSE: MAXIS, stock-code 5051) who made the surprise announcement to take the company private by offering $15.60 per share, 20% “windfall” above the stock closing price before the announcement, to minority shareholders.

Some of the listed companies which has proposed the same privatization includes:

  • Petaling Garden
  • Malakoff
  • Ramatex
  • Island and Peninsular
  • NexNews
  • PPB Oil Palms Bhd (KLSE: PPB, stock-code 6823)
  • Computer System Advisers
  • Berjaya Capital

And now you have another tycoon who is rumor to take his cash-cow, Hong Leong Financial Group (KLSE: HLFG, stock-code 1082) private. According to Business Times which in turn quoted Credit Suisse report, Quek Leng Chan might take the firm private soon. Credit Suisse further put a price tag of RM 8.50 a share compare to today’s closing price of RM 6.80 per share. Already the country’s fifth largest bank AMMB Holdings Berhad (AMMB: stock-code 1015) said it was considering taking private its investment banking arm, AmInvestment Group Bhd.

Malaysia’s Second Finance Minister said “The local stock market should be vibrant in order to attract more companies to list. The SC and Bursa should take all actions in terms of marketing, procedure, efficiency and flexibility (of) structure to make the stock market vibrant.”

Analysts and investment bankers expect the privatization trend to gather momentum as major shareholders of companies take full advantage of cheap ringgit debt to fund buyouts. But the Second Finance Minister insists the recent privatization will not make the local market less attractive. However you should take his statement with a pinch of salt as the government is known for not giving truth statements nevertheless.

But one thing is for sure, the Malaysia is getting less attractive for both owners and investors. It has to do with the lack of government initiatives in attracting foreign investment. Malaysia is already handicapped with its’ small population and hence the small demands or market. When the listed companies have reached the saturation level, it needs to expand regionally, the same way it need investors to appreciate it’s value (having said that I still believe Maxis has under-offer the minority investors). The only solution is to attract foreign investors. As much as foreign investors are tempted to such stocks, they are not stupid when decide to pour in their funds into a certain country. If the country is not transparent and takes investors for granted without a good governance to protect business interest, they might as well take their business elsewhere. Still puzzle why Hong Kong and Singapore have been their preferred investment destination?

So, what will happen next? More and more quality conglomerates will take their company private will only force the local authorities to push some poor-quality companies to be included into the index and you’ll have a set of inferior companies to invest in. The chain-reaction will continue until the local investors do not even have appetite for it. But will the authority wake up from his sleep and do something about the whole economy? Let’s pray.

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Comments

Just to recap, there is one privatisation which was not mentioned in your article ie Rohas-Euco Industries Bhd (Rohas). Before I go further, I would like to declare that I am a minority shareholder Rohas and a very unhappy one following the announcement of the proposed privatisation of Rohas at a ridiculously low price of RM1.80 per share. You think that the privatisation price of Maxis is low, wait till you do a detailed analysis of the Rohas case.

Briefly, at the proposed privatisation price, the price-to-earnings ratio is a ridiculous low level of 3.5 times based on latest annualised earnings for 2007 which is a whopping 75% discount to the average price-to-earnings ratio for the market. To add salt to the wound, the privatisation price is at a discount of around 10% to the net tangible asset as at 31/3/2007. In comparison to the average market price before the announcement, the premium is less than 4%, the lowest among all the recent privatisation exercises. And this is in the midst of a very positive environment as supported by the statement by the Chairman in its latest annual report which highlighted that its the best results Rohas has achieved since its listing. Prospect wise, it looks rosy. For the first quarter of 2007, the earnings per share was 12.28 cents, a huge jump from the corresponding period in the previous year. Annualised it, the earnings per share is a smart 49 cents, a gem among the small cap stocks, isnt it! Whichever you look at it, the privatisation price is way below fair value and it stinks.

The odds are heavily stacked against minority shareholders like us. Firstly, the majority shareholders have in combined of more than 50% after the CIMB Group( which is also the advisor to the promoters of the privatisation exercise) has agreed to tender its 4% plus stake in Rohas to the promoters. The promoters have also been acquiring more shares in the open market since the announcement. All it needs is to acquire another 25% of the equity in Rohas and the whole privatisation exercise will be accomplished as the promoters have declared its intention of a delisting once the public spread regulation is breached. This delisting threat really defeats the more stringent 90% threshhold before compulsory acquisition kicks in. Afterall, once the delisting kicks in, there is no choice for minorities like us but to submit unless one has the financial means to be a private equity investor.

Meantime, minority shareholders are also not in a position to make a well informed decision without a detailed report in regards to the fair value and prospect of the company going forward from the independent advisor and may have contributed to their current selling in the open market.

Secondly, the Board has stated that it is not seeking an alternative bidder. This stance may have been taken as the promoters have secured more than 50% of the equity in Rohas and alternative bidder may be an exercise in futility. Having said that and although by law there may not be a compulsion, should the Board not refrain from taking such a position until it receives the report from the independent advisor. Afterall, one of the roles of the Board, I believe, is to protect all shareholders interest including the minorities and also to seek the best value for its shareholders.

Clearly, the current laws do not favour minorities in privatisation exercise and I hope the Authorities will look into tightening the privatisation rules including the threat of delisting to better protect minorities. Afterall, their participation is quintessential to a robust stock exchange.

At the moment, I am still holding on the shares and I hope other investors such as EPF ( held thru Pheim Asset Management) will also do so so as to derail this unfair privatisation exercise. I also hope you can post an article on this for the benefit of the investment community.

Thank you.

YH Yeong
Minority Shareholder Of Rohas

yes yeong, i have missed out rohas and probably some others … nevertheless the message was that minority shareholders are “not” protected at all …

unless and only unless all the minority shareholders stay unite and shows the minority-power to both the major shareholders and the government …

but it’ll never happen in malaysia or else this country would have a better “good-governance” …

many thanks for your reply and empathy. in any event, i am not going to just lie down and be trampled all over without squeaking a sound. I will be e-mailing to Pheim Assets Management ( acting for EPF which holds a significant stake in Rohas) once I get hold of their e-mail address urging them to go against the privatisation. meantime, I would appreciate if you could post the comments as per my e-mail to you. At least, let the investment fraternity knows. Thats the least, I guess at the moment, I can do. By the way, sorry to say that the earlier comments have been deleted but are quite similar to what has been e-mailed to you.

Dear Sirs

the attached e-mail has been sent to stocktube blog for posting. it is also being sent to your esteemed organisation for your consideration to oppose the privatisation of Rohas. Based on the shareholding list as stated in the 2006 audited accounts, your esteemed organisation holds 1,500,000 shares in Rohas on behalf of EPF.

Look forward to a favourable reply from your esteemed organisation. Many thanks.

YH Yeong
Minority Shareholder of Rohas

The current trend of privatisations seem to mirror what happened in HK in 2001.

Check this out: http://www.webb-site.com/articles/hobsonschoice.htm

in particular, the conclusion..

Conclusion

The current Listing Rule… is quite clearly in conflict with the Takeover Code, as it allows a route for controlling shareholders to threaten minority shareholders with becoming shareholders in an unlisted, unregulated company. Faced with that, they are more likely to accept a miserly offer. This in turn means that minority interests in companies will trade at a substantial discount to fair value because of the risk of being forced to sell out at a discount. As we have pointed out before, this increases the cost of capital for all companies, good and bad, which makes Hong Kong’s companies less competitive in the global market.

Apart from privatisations which result in 100% ownership by one party, there is no conceivable circumstance in which it is in the interests of public shareholders to have a listing cancelled, as it strips them of regulatory protection and a visible marketplace for their stock.

Therefore Listing Rule 6.12 should be scrapped, and instead controlling shareholders who wish to privatise a company should be required either:

to include in the offer a 90% acceptance condition which gives them the legal right of compulsory purchase, and undertake to use that right; or

if they set a lower acceptance condition, they must undertake, if they do not achieve 90% acceptances from the public, to sell down their stake to raise the public holding back to the level needed to maintain a listing without suspension.

Obsolete Free Float Percentage
The question of whether the SEHK minimum free float of 25% is appropriate (Listing Rule 8.08) should also be addressed. Other markets have long recognised that the ability to manipulate a company’s stock price depends not so much on the percentage of the shares that are held by the public, but on the dollar size of the “free float” held by the public, and the number of public shareholders. They therefore allow companies to remain listed even when the public percentage is very small, so long as there is a viable market size.

Public shareholders have no more rights when they have 25% than when they have 10% of a company, so this is not a question of votes.

In Hong Kong, the SEHK will accept listing applications on the main board with only a HK$50m (US$6.4m) free float, but requires all companies with market value of less than HK$4,000m to have a free float of at least 25%. This gives rise to the ridiculous situation where a company with a market value of $3,900m but a free float of $900m (23%) may be suspended from listing, while one with a free float of only $50m is free to trade.

The SEHK should therefore scrap the 25% requirement and allow listings to be maintained so long as the market value of the free float does not fall below HK$50m, or whatever minimum dollar value is set.

The risk of market manipulation when a free float (however large in value) is held by a small number of shareholders remains, but the way to deal with that is by prosecution of the offending shareholders, not by penalising the innocent with a suspension of trading in their stock.

reference is made to the comments on the privatisation rules in the HK stock market. For sure, there is more shareholder activism therein Hk compared to Malaysia. David Webb is one of those and he has a good following. And his recent actions to reject one of the latest privatisation exercise due to extremely lousy offer price is a case in point. Here, for reason of apathy and lack of knowledge, the poor investors just have to succumb to the lousy offer price once the threat of delisting is thrown in. and you gotta have the feeling even the independent advisors are not giving you the best advice.
I only got to know after reading from the papers that the offerors can shit threaten you with a delisting after they have gotten 75% of the equity, but in fact it is not a done deal until the 90% level is breached. simply, an EGM must be convened and there must not be more than 10% objection to the delisting. I wonder how many know of this ruling? And Bursa has recently came up with a clear statement that delisting is not automatic even with the breach of shareholding spread as there are more than one way to deal with this.
Having said this, why is this sort of information not highlighted in the advisory notices given to minorities? The authorities must insist from now onwards for this inclusion to better inform minorities who are more often than not ignorant of the regulations. Is there a dereliction of duty by the advisors in this instance? How can there be a fair and orderly market if information is not readily forthcoming for everyone?
And I also exhort the Authorities to amend the rules so as to take away the threat of delisting; which is the easy way for the offeror to make a sucker out of the minorities. The proposed privatisation of Rohas is a classic example. Even the investment bank acting as the independent advisor cited the threat of delisting as one of the key factors in their decision and even overrides all universally accepted valuation methods.
I think as a minortiy shareholder of Rohas, I have written enough on this. I will be defiant shareholder and will not tender one share even if it is delisted. To Mr Sia and Tan Sri Azmi, I like to let you know that unless you obtain 90% of the shares I will fight on and I can assured you I not lie down and you will find my nuisance at times unbearable.

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