Earlier this month, Lippo China Resources Limited (“LCR”) and funds managed by and including Argyle Street Management Limited (“ASM”) jointly launched a voluntary unconditional offer of 57 cts for each TIH share pursuant to a consortium agreement signed on the same day. The offer is made through Kaiser Union Ltd ("Bidco"), an SPV wholly owned by LCR.

Of the 57 cts per share, 12.5 cts is to be paid in cash with the remaining 44.5 cts to be paid in the form of a 3 year 2.25% unlisted unsecured senior bond issued at par by the Bidco. ASM and its funds have already undertaken to tender a maximum of 110,732,656 TIH shares equivalent to 45.8% of the total issued share capital in acceptance of the offer. The number of shares to be tendered by ASM and its funds will be reduced by the aggregate number of shares tendered by minority shareholders and acquired through open market purchases made by the Bidco.

Based on the responses so far, it seems that the offer has not been received well by the minority shareholders. While it remains to be seen if shareholders have indeed been short-changed, we think one big winner has already emerged regardless of the outcome of the offer: the Lippo group.  

Firstly, due to the undertaking by ASM and its funds, LCR is already assured of acquiring an initial 45.8% controlling stake in TIH based on its 100% ownership of Bidco (although Bidco, LCR and ASM may transfer TIH shares between themselves to achieve their desired shareholding levels within 12 months of offer close). If Lippo’s intention is indeed to expand its securities and fund investment business in Asia through TIH, then this is certainly a cost effective way to do so. Afterall, based on the undertaking shares, LCR need only pay a maximum amount of $13.8 mil upfront for the entire stake with the remainder mostly paid 3 years later.
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Secondly, and perhaps more importantly, the move actually helps Lippo tighten its hold on OUE Ltd. To understand why, we only need to look at the simplified ownership chart  compiled below:

From the chart, we can see that ASM plays an integral role in Lippo’s control over OUE via the holding entities, Lippo ASM Asia Property Ltd (“LAAPL”) and Fortune Code Ltd (“FCL”).

In particular, ASM-controlled TIH currently owns a 7.95% stake in FCL which in turn controls more than 68% of OUE shares. Had ASM sold its stake in TIH to a 3rd party, Lippo would have to deal with a potentially unfriendly minority shareholder in FCL. The Joint Offer by ASM and Lippo’s LCR basically ensures that such a scenario would not happen.

On top of it, Lippo will now gain direct control over the stake in FCL held by TIH. All these for a upfront cash outlay which is unlikely to burn a hole in Lippo’s deep pockets.
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In our opinion, this makes them the biggest winner in this takeover exercise, by far. 

Less than 2 days after our initial post diagnosing the current state of SIA’s takeover offer for Tigerair shares, SIA upped the ante by announcing that it has waived the 90% acceptance condition, making the offer unconditional in all aspects, as well as further extending the offer period to 5 February 2016 from 22 January. It also announced that shares it and its concert parties control including valid acceptances has reached 79.22% of total outstanding shares as at 8 January 2016. 

Our Take

We see the latest move by SIA as positive for SIA and minority shareholders of Tigerair who have either accepted or plan to accept the revised offer. Specifically for SIA, declaring the offer unconditional offers it a couple of advantages.

Higher chance of SIA getting to the compulsory acquisition threshold

Firstly, it means that SIA can now extend the offer beyond the 60th day (25 January 2016) to 5 February 2016. As explained in our previous post, an offer will not be allowed to extend beyond the 60th day after the date of posting of the Offer Document unless it has become or been declared unconditional. This is important for SIA as its ultimate aim is to be able to fully privatize Tigerair. Being able to extend the offer period gives it more time to accumulate acceptances and consequently a higher likelihood of bringing its total shareholdings across the compulsory acquisition threshold of 95.58%.

Opens up other privatization options in future

Furthermore, declaring the offer unconditional allows SIA to keep any shares tendered during the offer period even if its resultant shareholding ends up being less than 90%. From a strategic perspective, the tighter control opens up future privatization options such as a voluntary delisting via Rule 1307 of the SGX Listing Manual where, as the majority shareholder holding more than 75%, it will be able to vote through the delisting resolution subject to no more than 10% of shareholding votes present at the general meeting voting against it.

News is positive for shareholders who intend to accept…

For shareholders who have already accepted or intend to accept the revised offer, the waiver of the 90% acceptance condition gives them certainty of monetizing their holdings at the offer price. This is unlike under the previous scenario, where they would have to wait for SIA’s total shareholdings plus acceptance level to cross 90%.

…but not so much for dissenting shareholders.

On the other hand, shareholders who had intended to hold out with the expectation that SIA may revise the offer price upwards again, however low the possibility, will be solely disappointed to see their hopes dashed. For this group of shareholders, you may refer to Scenarios B and C depicted in our previous post.

It has been a full 2 months since Singapore Airlines Ltd (“SIA”) launched a much awaited takeover offer for all shares in Tiger Airways Holdings Ltd (“Tigerair”) it does not own. Yet, there seems to be a fair bit of hesitation amongst Tigerair minority shareholders in accepting the revised offer from SIA of $0.45 per share (up previously from $0.41). Some of the unhappiness stems from the fact that the Singapore national carrier paid a comparatively higher price of 67.8 cents per share to acquire a 7.3% stake from its parent company Temasek Holdings in December 2013.

While we will not weigh in on the fairness of the offer (there are enough market opinions/advice out there for minority shareholders to mull over with respect to that), we believe that shareholders should take note of some key issues when considering whether to ultimately accept SIA’s revised offer.

Figure 1: Will the Singapore national carrier succeed in fully taming the Tiger(air)? (Picture source: wikipedia, NT News)

Background

SIA initially launched an offer of $0.41 per share for all Tigerair shares not owned by it on 6 November 2015. The offer is conditional upon SIA’s total shareholding inclusive of valid acceptances hitting at least 90% before the end of the offer period. While the offer was originally slated to end on 28 December 2015, it was extended to 8 January 2016 after SIA fell way short of its target (74.5% then vs 90%).

On 4 January 2016, SIA revised the offer price to $0.45 and further extended the deadline to 22 January 2016 indicating at the same time that it does not intend to revise the price further.

Key points to note

Current offer vs consideration for Temasek’s shares in 2013

So is the SIA revised offer really worse off when compared to the consideration it paid for the Temasek sale shares as some believed? On the surface, it may seem so. After all, on an absolute per share basis, 45 cents per share is 34% less than the 67.8 cents SIA previously paid. This, however, has not taken into account the 85 for 100 rights issue in late 2014 during which Tigerair offered new shares to then existing shareholders at 20 cents per share. Once accounted for, the consideration paid during the Temasek purchase would have been adjusted down to 45.8 cents, just 2% higher than SIA’s current offer.

Furthermore, the current SIA offer that is taking place at a time when the market conditions are weaker (as measured by FSTE ST All Share index), is also superior when we compare other measures such as premium paid over prevailing market prices and the implied price to book ratio.

Figure 2: SIA’s current offer is no less compelling than that offered to Temasek in 2013

Hence, we think there is little evidence to suggest that the current revised offer is less compelling than that offered to Temasek for its shares in 2013.

Offer may not be extended by much longer due to regulatory restrictions

That SIA has extended its offer period twice so far in a bid to convince Tigerair minorities shows its resolve to take the ailing budget airline private. Still, shareholders who have yet to take up the offer should not expect another significant extension. This is because the Singapore Code on Takeovers and Mergers specifically provides that:

“No offer (whether revised or not) will be capable of becoming or being declared unconditional as to acceptances after 5.30 pm on the 60th day after the date the offer document is initially posted nor of being kept open after the expiry of such period unless it has previously become or been declared unconditional as to acceptances. An offer may be extended beyond that period of 60 days with the permission of the Council. The Council will consider granting such permission in circumstances, including but not limited to, where a competing offer has been announced.”

As the Offer Document was posted on 26 November 2015, this implies, by our calculation, that SIA would not be able to extend its offer period beyond 25 January 2015 (vs the current deadline of 22 January 2015) unless permission is sought from the Securities Industry Council (SIC), often in exceptional circumstances such as a competing offer. With SIA owning more than 57% as at 8 January 2016, not including acceptances as offer has not turn unconditional, it is hard to see the SIC allowing such an extension. 

Likely scenarios and their implications for shareholders

So given that SIA’s offer is unlikely to be revised or extended much further, shareholders should naturally be aware of the different scenarios that will play out come 22 January 2016 and how it will affect their options.  

Scenario A: SIA fails to hit the 90% shareholding threshold

As the offer is conditional upon SIA hitting the 90% shareholding threshold, the offer will lapse if SIA falls short of this level. Consequently, all Tigerair minority shareholders, regardless of whether they have previously accepted the offer, will retain all their original shareholdings and not receive any consideration from SIA for them. 

Scenario B: SIA reaches the compulsory acquisition level (95.58%)

Under Section 215(1) of the Companies Act of Singapore, SIA would be entitled to compulsorily acquire all shares held by the minority shareholders should it accumulate during the offer period, through valid acceptances or on-market acquisitions during the offer period at least 90% of all shares excluding those owned by it at the start of the offer.  Since SIA and its concert parties already owned 55.79% of Tigerair’s shares as at commencement of the offer, this follows that it will need to acquire another 39.79% (0.9 x 44.21%) during the offer period, hence a total of 95.58%, to have the right acquire all minority shareholdings. Under this scenario, all shareholders would have to sell their shares to SIA irrespective of whether they chose to accept the offer.

Scenario C: SIA reaches 90% but falls short of compulsory acquisition level (95.58%)

If the eventual shareholding of SIA falls between 90% and 95.58% during the offer period, the situation becomes a little more complex.

Firstly, the offer will still be declared unconditional and all shareholders who have tendered their shares prior to closing, will be entitled to receive the revised offer price for their shares.

For dissenting shareholders who chose not to accept the offer, you should note that under the SGX listing rules, any listed company with a public float of less than 10% will face a trading suspension imposed by SGX and an eventual delisting unless the company takes the necessary steps to restore the public float to the minimum level. As SIA has already explicitly indicated that it does not intend to restore the public float and retain the listing under this scenario, these dissenting shareholders will likely be holding shares in a private company post the offer period.

However, dissenting shareholders will still be able to require SIA to acquire their shares for a period of time after the offer period by invoking their rights under Section 215(3) of the Companies Act. This right kicks in as long as SIA acquires at least 90% of all Tigerair shares including those it held as at commencement of the offer. Shareholders should note the difference between their right to require their Tigerair shares to be acquired by SIA and the right by SIA to compulsorily acquire theirs.

Should the dissenting shareholders choose neither to accept the revised offer nor to invoke their rights under Section 215(3) of the Companies Act, they will remain as minority shareholders of an unlisted Tigerair. While such a situation may not be ideal given that they will no longer have the benefit of being able to trade their Tigerair shares on SGX, there have been instances (the CK Tang privatisation in 2009 comes to mind) where holding out may pay off eventually in the form of an improved offer in future if Tigerair shares are indeed being undervalued by SIA’s current offer as they might believe.

Final Note

We may have taken all reasonable efforts to verify the information we presented in order to provide shareholders and investors in general with a good overview of the key issues pertaining to the SIA offer. Nevertheless, we encourage all investors and shareholders alike to familiarise themselves with key regulations governing a takeover offer including the SGX Listing Manual, Singapore Companies Act Section 215 and the Singapore Code on Takeovers and Mergers. This is so that they would be better equipped to evaluate their options and make better investment decisions should circumstances similar to this arise in future. 

(All currency in SGD unless stated)

KSTB has recently been the subject of a takeover attempt by its co-founder, Dato' Chee Peck Chia, an oil and gas industry veteran who together with his concert parties, announced a conditional voluntary takeover  offer (the "Offer") on 23 March 2015 for all remaining shares not owned by them. The offer price of RM0.48 per share is at a small premium to the last traded price of RM0.46 a share before the takeover announcement and a significant discount to its last reported NTA of RM0.67 per share as at 31 December 2014. However, taking into account the timing of the offer and the adjusted NTA per share of RM0.44, we do not think this is necessarily a bad development for KSTB shareholders.

Background

Up until 2014, KSTB had been engaged in the core business of providing tubular handling equipment and running services as well as tubular inspection and maintenance services for companies in the oil and gas industry. It was also in the business of providing land rig services. 

However, that began to change in November 2013 when it entered into an agreement with Bursa-listed Destini Berhad to dispose of its entire interest in Samudra Oil Services Sdn Bhd ("Samudra Oil"), through which it had been conducting its tubular handling equipment business, for RM 80 million. The consideration was satisfied fully in new Destini shares to be disposed of via a placement exercise. The disposal of Samudra was subsequently completed in April 2014 following which the Destini consideration shares were placed out at RM0.35 each[1].

Concurrently with the disposal of Samudra Oil, KSTB also entered into two separate agreements with Indonesian drilling services provider, PT Duta Adhikarya Negeri, to dispose of its 2 land rigs for a total consideration of US$10.5 million.

Figure 1. Part of KSTB’s tubular inspection & maintenance services

With the disposals, KSTB effectively exited both the tubular handling and land rig businesses, leaving it with a relatively small tubular inspection and maintenance services business which is currently operated by its wholly owned subsidiary Samudra Timur Sdn Bhd. As a result, the Company triggered Practice Note 17 ("PN17") of the Bursa listing rules giving it until 2 April 2015 to acquire a new core business in order to maintain its listing status. The Company subsequently triggered Practice Note 16 of the Bursa listing rules as a cash company on 27 February 2015. On the basis of its PN16 status, it has applied to seek an extension of the deadline to acquire a new core business to 26 February 2016. The outcome of this application is currently pending.

For the half year ended 31 December 2014, the group recorded after-tax profit (PAT) of approximately RM3.67 million, translating into a fully diluted EPS of 1.61 sens per share[2]. PAT was up from RM0.13 million in the previous corresponding period in 2013 with the increase largely attributed to foreign exchange gains of RM2.45 million and interest income of 1.65 million. Revenue was RM5.85 million.

Conditional Voluntary Takeover Offer by Dato' Chee and Concert Parties

On 23 March 2015, Dato' Chee Peck Kiat, his son Chee Cheng Chun and Darmendran a/l Kunaretnam (collectively "Joint Offerors"), an Executive Director of the Company, made a conditional voluntary offer for all outstanding shares not held by the Joint Offerors amounting to 76.72% of the total outstanding shares of the Company.  The all cash offer was  RM0.48 per share. Concurrently, the Joint Offerors[3] also made an offer of RM0.18 for all outstanding warrants of the Company not held by them amounting to 69.92% of the total warrants in issue. The Offer is conditional upon the Joint Offerors achieving a minimum shareholding percentage of at least 50% by the close of the Offer. In addition, the Joint Offerors have indicated their intentions to keep KSTB listed.

Our Views

Success of the Offer lies in the hands of a few shareholders

With sizeable stakes in the Company concentrated in the hands of a few key shareholders (We will call them “Key Shareholders” here), the success of the Offer depends very much on their willingness to accept the Offer terms.

Figure 2. A few significant shareholders hold the key to the Joint Offeror’s success in the takeover Offer. Joint Offerors are shaded blue and key shareholders highlighted yellow.

These Key Shareholders include long time shareholders, Innoteguh Sdn. Bhd.  and Trance Equity Sdn. Bhd. (not to be confused with Trance Rex Sdn Bhd) as well as Sterling Honour, Seamless Excellence and Oval Triangle, all of whom became shareholders by virtue of converting their ICULS[4] holdings. The Key Shareholders altogether hold 39.50% out of the 76.72% shares not owned by the Joint Offerors and have yet to give any indications as to their intentions with regards to the Offer.

We do not think any of the Key Shareholders holding significant shares have any compelling reason to put up a competing offer with the offer price already at a premium to adjusted NTA per shares. Should they wish to thwart the takeover attempt by the Joint Offerors, inaction may be the best course of action as the Joint Offerors still need to acquire another 26.72% of shares just to make the Offer unconditional. Furthermore, the board of KSTB had also announced on 25 March 2015 that it does not intend to seek an alternative offer.

Offer Price is at a premium to adjusted NTA representing a decent valuation of the remaining tubular inspection and maintenance business  

The offer price of RM0.48 per share is only at a small premium of 4.3% over the last traded price of KSTB prior to the Offer announcement. It is also at a significant discount of 28.0% to its last reported NTA of RM0.67 per share as at 31 December 2014.

However, taking into account adjustments from shares issued arising from conversions of the ICULS issue and warrants as well as its recent dividend payout of 4.5 sens per share, we estimate that the offer price is actually at a premium of 9.8% to KSTB's adjusted NTA of RM0.44. See Figure 3 below for computation.

Figure 3. Computation of adjusted NTA of KSTB

For the past 5 financial years, the remaining tubular inspection and maintenance service segment has contributed between RM 8.77 million to RM11.11 million in revenue and RM 0.72 million to RM 2.78 million in profit before tax, or an average of RM 1.53 million equivalent to a fully diluted pre-tax earnings per share of just 0.6 sens. 

Figure 4. Historical segmental results of the remaining tubular inspection & Maintenance Service business

As such, the offer premium over NTA of RM0.04 per share implies a valuation of approximately 7 times profit before tax for the tubular inspection and maintenance services business, which is neither too expensive or cheap in the current environment.

Takeover timing needs to be taken into consideration too

Further taking into consideration that the Company is already past the first deadline of 2 April 2015 for submission of a regularisation plan to Bursa Securities to continue its listing status and with the further extension of such deadline to 26 February 2016 uncertain, we believe existing KSTB shareholders should see the Offer as a welcome insurance in the event that the Company is forced to delist. According to the Malaysian takeover rules, the offer document has to be sent to shareholders within 21 days of the takeover announcement on 23 March 2015 and the Offer will need to be open for acceptance for at least another 21 days after the offer document has been despatched. This should buy some time while shareholders await Bursa's response to the Company's request for extension of time to acquire a new core business.

Recommendations

We believe shareholders should wait and see if the application by KSTB to extend the deadline to acquire a new business to 26 February 2016 is approved before making a decision on the Offer. As the Offer will be open for a minimum of 21 days after the Offer document has been despatched to shareholders, they will likely have between 3-4 weeks time while awaiting Bursa's decision. In the event that the extension is rejected by Bursa and the Company faces the prospects of being delisted, we believe that the RM0.48 cash offer provides an adequate compensation for shareholders to exit their investments. Should the extension be approved, KSTB will have until 26 February 2016 to acquire another new business to stay listed. In this case, even if shareholders decide to hold on to their shares, we believe that the downside will be limited given that the bulk of KSTB's assets consist of cash.

For investors not vested in the Company as yet, there is little risk but limited upside in buying in at the current price of RM0.48 per share pending acquisition of a new core business.

[1] Although the Destini consideration shares were placed out at the same consideration of RM0.35 at which they were issued, we note that this price was at an unusually large discount to the then prevailing share price of between RM0.57 and RM0.69 during the placement period even if we account for the low trading liquidity.
[2] Adjustments include interest and interest savings from the warrants conversion proceeds and ICULS conversion.
[3] On an unrelated but interesting note, we noticed that Chee Cheng Chun and Darmendran had also amassed a sizeable 18.64% stake in another Bursa listed company, Rex Industry Bhd, from 23 February 2015 to 5 March 2015 just prior to the Offer announcement. There are no indications as of now that the two transactions are related though.
[4] KSTB issued RM12.0 million worth of 5-year Irredeemable Convertible Unsecured Loan Stocks ("ICULS") to Maybank Berhad as part settlement of debt pursuant to a Debt Settlement Agreement dated 3 September 2013. It is not disclosed if Sterling Honour Sdn Bhd, Seamless Excellence Sdn Bhd and Oval Triangle Sdn Bhd are entities related to Maybank.