“If one does not know to which port one is sailing, no wind is favourable.” – Seneca
Forefront: By TSMP explores the M&A landscape and asks if 2016 will be the Year of the Big Singapore (Privatisation) Sale.
The (Head)winds of Change
The word most overused by bankers, bureaucrats and businessmen to describe the market in 2016, must be “headwinds”. And indeed, the first quarter of the year has been difficult for the global economy. As at 31 March 2016, Singapore’s STI Index was down approximately 18% from a year ago.
Against this backdrop of lower valuations, it’s little wonder that a wave of privatisations has started sweeping through the market.
In the past 6 months alone, 14 privatisations have been announced, accounting for more than S$9.74 billion in market capitalisation based on their offer prices1. The industries range from those facing tough economic challenges (airlines and shipping), to those considered more sexy (technology, health care and lifestyle products). They include, among them, household names like Neptune Orient Lines and OSIM.
|BioSensors International Group, Ltd.
||China Yongsheng Limited
||GMG Global Ltd
||HTL International Holdings Limited
||Interplex Holdings Ltd
||Lantrovision (S) Ltd
||Li Heng Chemical Fibre Technologies Limited
||Manufacture of Nylon Yarn
||Neptune Orient Lines Ltd
||OSIM International Ltd
||Select Group Ltd
||Sinotel Technologies Ltd
||Tiger Airways Holdings Limited
||Xinren Aluminium Holdings Limited
||Zagro Asia Limited
||Crop Care and Animal Health Products
1 Based on information in the offer announcements, and without taking into account offers for convertible securities (where any).
There has also been renewed speculation that SMRT Corporation Ltd could be nationalised, given recent unfortunate safety lapses. This would wipe out yet another S$2.26 billion from the total market capitalisation of the bourse.
Timely Changes to the Take-over Code
Coincidentally, the Singapore Code on Take-overs and Mergers was recently amended to clarify and augment certain provisions. These changes are opportune, as M&A activity increases. A key change is the establishment of an auction process for competitive offers, which came about as a result of the record-breaking Fraser and Neave take-over. (Please refer to the text box at the bottom of the article.)
What winds are these?
The increasing trend of privatisations, coupled with the dearth of new listings (8 in the past 6 months), do not appear to bode well for the listings market and capital markets professionals. Much ink has been spilt on the condition of the local stock market, including by this commentator; but not all of it has been entirely fair.
Stock exchanges globally are seeing a drying up of new listings. The FT Weekend on 2/3 April 2016 carried an analysis of the stagnant IPO market in the US: in 2015, the amount raised fell by two-thirds.
“Relative to other countries, the US now has abnormally few listed firms given its level of development and the quality of its institutions” the FT quoted from an economics paper.
The FT posits that this could in fact be a sign of a vibrant economy, as IPO aspirants are able to tap other sources of funds, ranging from hedge funds to private equity investors and bond markets. In Asia, private equity deals have also increased, with the Business Times reporting on 2 April 2016 that the segment set a new record of US$125 billion in 2015.
Singapore, too, is seeing increasing fundraising from alternative sources – including private equity (TPG Capital’s US$175 million in PropertyGuru, a home grown online property platform, in 2015 for instance), and crowdfunding (FundedHere, the first fully licensed platform, was established in March 2016).
It is true that alternative investors are often more nimble, especially in sectors like technology, being better able to evaluate the business than retail investors. They can also write larger cheques and offer more aggressive valuations. But to say that fewer companies are seeking a listing as a result solely of positive developments in the investment market is too simplistic.
Since the Global Financial Crisis, the world has embraced increased regulation as the antidote to the excesses of the Free Market. This has had a knock-on effect on stock exchanges, which are often regulated by the government (for example, the SGX is regulated by the Monetary Authority of Singapore). A regulatory approach seen as heavy-handed will discourage listings, and incentivise those listed companies which can, to de-list, especially if the market is trading at paltry PE ratios.
The SGX is facing the combined challenges of low PE ratios, complaints of over-regulation, and direct competition from other investment sources. To its credit, it is seeking ways to incorporate alternative funding into its offering, in a bid to expand its connectivity with start-ups who could, one day, be listed on its boards. It is also fine-turning its regulations to be more responsive to the needs of the market.
But with the topography of the investment environment changing globally and fast, Singapore will have to work even harder to re-position its stock market, and re-invent its investment landscape.
The first quarter of 2016 has flown by. Will this be a year remembered for the Great Singapore (Privatisation) Sale, or as a watershed moment when our markets embraced an expanding investment universe?
The landmark Fraser and Neave take-over
Market participants will remember that in 2012, ThaiBev tycoon, Charoen Sirivadhanabhakdi, had made a voluntary cash offer for Fraser and Neave Limited (F&N) at S$8.88 per share. The board of F&N, wanting to realise better value for its shareholders, took the unprecedented step of offering a S$50 million break fee for a higher price of S$9.08. OUE Ltd (TSMP was involved on the OUE side of the deal) stepped in. Thus started the largest take-over offer SE Asian markets had ever seen, with the corporate battle lasting more than 6 months.
What was unusual about this offer was that in prior take-over battles, one bidder had always fallen away before the end; here, both bidders stayed in the bidding war until time ran out under the Take-over Code.
The Code did not have the provisions needed to cope with this situation. Crucially, it was silent on the applicable rules on the final day of the offer – without a procedure, the offeror with the boldness to wait until the last possible moment to throw in its revised offer would win the day.
The Securities Industry Council issued a public statement on how and when raised bids could be submitted in that offer. The lessons from this landmark transaction have now been entrenched into the Code, which took effect on 25 March 2016.