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What Happens When A Publicly Listed Company Gets Privatised?

Whether we are a voting shareholder or not, a buyout offer of a company will leave us with a decision to make.

Privatisation happens when a publicly-listed company receives a buyout offer from a private company. Some companies that have been privatised in recent years include: SMRT, Keppel Land, Neptune Orient Lines (NOL), OSIM International and more.

Why Privatisation Happens

There are many reasons why a company gets privatised.

  • The company is undervalued: Being undervalued is one of the reasons a private stakeholder such as a private-equity firm offers to privatise the company. Another result of a company being undervalued could be the company choosing to list in another country’s stock exchange instead.
  • The company is undergoing some restructuring or reorganisation: Companies privatised due to corporate restructuring or a shift in the company’s interest.
  • Strategic reasons: Changes in the company’s business strategy and future plans could affect the company’s listing on the stock exchange. Companies could also choose to strategically list in another country’s stock exchange instead. For example, in the case of Osim International, after delisting from SGX, it was re-listed on the Hong Kong stock exchange under the name V3 Group.

Privatisation can happen either with a mandatory or voluntary offer. Here’s what each type means for shareholders and the privatisation effort.

Mandatory Offer

A mandatory offer must be made when a person (as well as the parties with him) acquires 30% or more of the voting rights of a company or when a person that holds 30%-50% of the voting rights of a company acquires additional shares by more than 1% in a 6-month period. This mandatory offer will be offered to shareholders with shares that carry votes.

For example, in 2018, a mandatory unconditional cash offer was made by Goldhill Trust for shares in Chew’s Group, offering S$0.2107 in cash per share for the remaining shares in the company. This came after Goldhill Trust acquired Fenghe Investment Holding’s 68.14% stake in Chew’s.

Voluntary Offer

A voluntary offer is an offer for the voting shares of a company and does not trigger the conditions that requires a mandatory offer. This offer price must be higher than the highest price paid by the offerer for any shares during the offer period and within the three months leading up to the beginning of the offer period.

This voluntary offer must be conditional, until it receives the level of acceptances pre-determined, upon which this offer will be made unconditional (i.e. the offering party would need to obtain enough acceptances in voting rights such that they hold more than 50% of the voting rights in order for the offer to go through).

This exit offer, usually in cash, is made to the shareholders. An independent financial adviser (IFA) will also be engaged to assess if the exit offer is reasonable.

For example, in recent news, Keppel Corp Ltd and Singapore Press Holdings (SPH) made a pre-conditional voluntary general offer of S$2.06 per share for the remaining M1 shares they do not own. This offer will be made through their joint venture company, Konnectivity Pte ltd. This pre-conditional offer is subject to approval from the Info-communications Media Development Authority (IMDA). Upon approval, this pre-conditional offer becomes unconditional when the offering party obtains more than 50% of the issued share value by the close of the offer.

What happens when the offering company does not obtain more than 50%?

This could be the case when existing shareholders feel that the offer price is not fair. There are a few possible scenarios:

  • Company revises the offer upwards
  • Company does not revise the offer and instead withdraws the offer

In a situation where this shareholder obtains 90% of acceptances in value of shares, he can exercise a right to compulsorily acquire the remaining shares. This means that the company can make a general offer to the rest of the shareholders to buy their shares.

What Happens To Shareholders During Privatisation?

Buyout offers can be all-cash or cash and stocks (of the offering company). Very often, the offer price provided by the offering party is higher than the stock’s current trading price. The question is how much higher this price is and is it a price that is deemed reasonable for what the company is worth. When the offered price is not reasonable, voting shareholders can vote not to agree to the offer.

Assuming the price offered is reasonable and has been accepted, here are a few possible scenarios for shareholders to consider.

Scenario #1: Wait For The Buyout To Take Place

In an ideal scenario where the price offered is reasonable, shareholders wait for the buyout date and get cash in exchange for shares. This is based on the offer price that was accepted by majority of the shareholders.

This buyout situation works out well for shareholders that bought the shares at a price that is lower than the offer price. There is little for the shareholders to do in this scenario as well, except to wait for the shares to be removed from their account and for cash to replace it. Furthermore, shareholders will not be required to pay a commission fee, unlike normal selling of shares where commission fees will be incurred.

In a situation where the buyout is in cash and shares, shareholders will see their existing shares be removed and replace with cash and shares of the offering company.

Scenario #2: Selling Your Shares On The Market Before The Buyout Date

With the announcement of the buyout offer (and possibly even before that), there is a high chance of the share price going up close to the offer price. Shareholders can still sell it on the exchange before the buyout date. In this case, you can sell your shares

There are perks to selling before the buyout date. You get the cash in hand earlier than holding the shares through the buyout date which could drag a few months. This is also an option if the buyout offer is in cash and shares, but the shareholder does not want the shares of the offering company. If the buyout deal falls through and the share price plummets as a result, you would benefit from selling at a price you deemed was ideal.

On the flip side, if the deal falls through but shareholders are expecting a revised offer that is higher than the original offer price, you could end up regretting not holding on to the shares. Furthermore, it is likely that the price you sell the shares at on the exchange would be lower than what you would get if you held it through the buyout date. Also note that you will need to pay commission fees when you sell your shares on the exchange.

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