More On Privatisation Issue

Fellow blogger, Salvatore Dali, featured my post, Privatisation, a heathy trend? on the very popular blog, Malaysia Finance Blogspot, in a posting called Privatisation / M&A In Malaysia.

I have a couple of comments on it and since it's rather longish, I thought it would be best that I made a whole new blog post. Plus this posting is not a direct reply to Sal but more mumblings on this issue frome me.

This was Sal's take.

• 4) For me, the issue is when a company is completely taken off the block. For example Worldwide, many minority shareholders buy for the long term as its NTA is anywhere from RM4.00 - RM5.00 while the market price traded usually closer to RM2.00. Naturally its a no-brainer for controlling shareholder to privatise the company especially with excellent cash flow. Merchant bankers worth their salt would be scrambling to lend money to the owners to do the buyout and get healthy advisory fees in return in an almost risk free scenario. The G.O. at RM3.50 seems rich compared to the market price for the last 12 months, does that mean minority shareholders should be appeased? The straight forward answer is NO. M.I.s invested for the long term to realise the full value of the company, even though RM3.50 is a huge premium to average market price, we do not know M.I.s entry price or investing objectives. While we cannot expect the controlling shareholder to offer RM5.00, we do expect a closer price to underlying value of the company.
• Part of the problem of growing privatisation is that the market does not value shares properly. Worldwide has been trading way below NTA for such a long time

Ah, yes there are so many different types of investors around. Some speculated but believes that they are investing and then there are some plain old investors. Investors, who would invest in a stock based on a business perspective. In Worldwide Holdings: Value or Value Trap?: Part II , I have clearly brought out the issue of value versus common business logic. The value was there always but because of the lack of management quality, how could the investor invest in such a company believing that they would be adequatly compensated for taking the risk in this company.

This was what's said then.

• Its total earnings for fy 2005 was 50.708 million versus fy 2004 total earnings of 52.632 million. Another sluggish performance. And what was Genting Sanyen Power earnings contribution to this group? 57.641 million.And again... don't you wonder what's happening in this listed company? Crudely put.. some might even question what the management is paid to do!

See the point? It's a known fact that Genting Sanyen (GS) is contributing so much money to the company. 57.641 million was what Worldwide said it contributed. But what about the rest of the business in the group? It contributed NOTHING. In fact, to be precise, it was a burden to Worldwide for total net earnings was only 50.708 million.

In Worldwide Holdings: Value or Value Trap? I drew up a table which clearly highlighted that showed from 1999 to 2003, if one discounts the GS conrtibution to the group, Worldwide would have lost money 3 years out of that 5 years. In short Worldwide has a historical record of making poor business ventures.

And in my opinion, this was why Worldwide was trading at such a low price for such a long time. There was value in the company no doubt but because of the management issue, I questioned the viability of an investment in the stock. Hence the title of the inital post, Value or Value Trap.

Anyway, let's wipe this out and assume that Worldwide is a CLEAN company without the poor management issue.

Now back to the issue of value.

How does one to value this GS stake? They, the market are insisting on RNAV. HLG Research values Worldwide's stake in GS to be worth 1.87 per share, which works out to a mere 330 million.

Can it be right when GS contributed 57.641 million in the last fiscal year? If you own such a stake, would you be willing to sell at a mere 330 million??

As mentioned in the other blog posting, Do you think privatisation is healthy? , to make an equivalent of 57.641 million, the comparison yardstick is the 4% money rate, in which one has to invest a whopping 1436.53 million to get an equivalent return, or the equivalent of 8.00.

Some would have used this as their investing objective.

And this is based on the GS stake itself, discounting Worldwide's landbank and waste management business and the piggy bank cash.

And this is why some would regard this GO of rm3.50 as shambolical.

So what can the investor do?

Is it fair?

Why shouldn't this GO, from the minority investor's perspective, be regarded as a business proposition?

The majority shareholder is making an offer to buy the shares from them.

Should the minority investor even sell at a discount?

Shouldn't the majority shareholder be buying it a premium instead?

Me? I hope they realised that they are short changed BIG TIME.

Amazing. The share market is the only place where business offers are so lopsided. I have seen it in the privatisation of Bumi Armada and I have also seen it in the case of Propel and Metro Jaya.

Anyway, I believe that there is something good to observe from this GO.

The argument is the minority shareholder is being offered a very raw deal. Short changed from getting their adequate compensation for risking their money in investing in their stocks.

Let's watch what will happens...

1. Will the authorities do something? Can the investor depend on someone, some party will come in and rescue them from being short changed?

2. If no... what's the best course of action in terms of an investor?


my answer? (let's see if I am right)

1. Fat hopes. Never rely on the 'market' to rescue you.
2. AVOID.. AVOID.. AVOID.. AVOID investing in stocks whose management/owners one cannot trust or whose integrity is questionable. (ps. big difference between investing and trading)

And in the issue of Worldwide, see why I hold my stance on it? Yeah, the speculators they made money and my congratulations to them but do look at the bigger picture. The market needs speculators just as it needs investor and I, from an investor point of view, to see such corporate exercise is shambolical to say the least. If the investor is never given a true chance to be adequately compensated for investing in the stock, the investor is better off avoiding these stocks or maybe shunning the share market totally if such unfair practices were to continue.

Oh... last but not least...

• That's because in deciding for privatisation, the deal hugely favours the controlling party already - hence someone must look out for the long-suffering small tenacious investor.

Well said Sal!!!

Imagine the market without the small tenacious investor!!!!