This article first appeared in The Edge Financial Daily on October 23, 2017
KUALA LUMPUR: The purpose of making a mandatory general offer (MGO) has come into question lately having seen that the substantial shareholders of Willowglen MSC Bhd and Dataprep Holdings Bhd have sold their stakes cheap at a sharp discount to market price.
Many in the investing fraternity were probably puzzled when a group of shareholders of Willowglen sold their shares at 80 sen apiece — 57.5% below the closing price of RM1.39 on Sept 11, the day before the MGO was announced.
The group of substantial shareholders, who collectively hold a 22.92% stake, sold all their shares to New Adventa Sdn Bhd, a company controlled by Willowglen managing director Wong Ah Chiew. Wong’s shareholding increased to 55% after the share transaction, and as a result he launched an MGO at 80 sen.
About a month later, Dataprep’s controlling shareholder VXL Holdings Sdn Bhd also sold its stake at steep discount to market price. VXL sold its entire 64.2% equity interest in the company to Wardah Communication Sdn Bhd at 16 sen per share. The transacted price was at 53% discount to the market price of 34 sen on Oct 10, the day before the MGO announced. Under the listing requirement, Wardah launched the MGO at 16 sen — an offer which the minorities are very unlikely to accept.
In a nutshell, should the emergence of new controlling shareholder entails changes in the board of directors and management, the MGO will not provide a fair exit for minority shareholders, who are not happy with the changes that take place.
Some quarters opine that minorities could always sell their shares in the open market at a much higher price in the case of Willowglen and Dataprep. However, under the circumstance that minorities were to rush to sell, the company’s share price will be succumbed to heavy pressures. Could the minority shareholders still sell at the price above the MGO level?
A corporate adviser, who is familiar with the deals, rebuffed that the lower MGO price is short-changing minority shareholders.
“A lot of people misunderstood MGO; there is no question arising from short-changing the minority shareholders. In these deals, both the buyers and sellers are happy with the price transacted, and the guidelines required them to make general offer based on the last transacted price as well,” the corporate adviser told The Edge Financial Daily.
“The question is, are the minority shareholders obliged to sell? If they think that the fair value is higher [than the MGO price], they can hold onto the shares,” he commented, adding that the two companies’ new shareholders have indicated their intention to keep the companies listed; hence there is opportunity for the minority shareholders to ride the future growth.
When contacted, former Pheim Asset Management Sdn Bhd investment director James Lau said there are multiple factors affecting an MGO price, but the consensus view is that minority shareholders should get at least net tangible asset value plus takeover premium.
“Takeover premium may be zero in rare cases but really depends on how coherent the minorities as a group are. In Malaysia, it is easy to exploit weaknesses in minorities’ will to fight for fair value and independent valuations seldom veer from the mundane,” Lau said.
Meanwhile, JF Apex Securities’ head of research Lee Chung Cheng said that in the case of Willowglen and Dataprep, no one has breached the law.
Lee opines that it is difficult for the regulators to judge whether such practice would defeat the purpose of MGO which is to provide a fair avenue for minority shareholders to exit.
“How do we define reasonable? From Willowglen’s new controlling shareholder’s perspective, maybe 80 sen is fair,” he said.
Nonetheless, a fund manager who declined to be named, said as long as the company remains publicly listed, the MGO offeror is not viewed as closing the avenue for minority shareholder to exit at higher price.
“Welcome to the world of minority shareholder, this is the kind of vulnerability you need to bear with. As long as the former substantial shareholder is willing to sell at a discount, for whatever reason except for forming a side deal with the buyer, then everything is legitimate,” he said.
“Unless the so-called ‘willing buyer, willing seller’ [are] involved [in] any side deal, to deliberately lower the MGO price, but this is something difficult to prove,” said the fund manager.
Another veteran investment strategist concurred, saying that while it is unusual for a company to have MGO prices significantly lower than market trading price, it is still very difficult to draw a conclusion that if minority shareholders are being short-changed.
“On the face of it, none of the parties are being unfairly treated, and for regulators like the Securities Commission Malaysia, it is hard for them to do anything, because at the end of the day, regulators are not supposed to interfere in pricing,” he said.