Published December 17, 2008

Sitting pretty on cash mines

Valuation of a clutch of companies has gone below NAV, but they aren't easy pickings for asset strippers

By CHEW XIANG

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(SINGAPORE) Over 100 listed companies are trading at discounts to their cash holdings, according to data compiled by shareinvestor.com, a financial portal.

Most of these companies are also valued below their net asset value, which means there's a lot left over to pocket once debts and other liabilities are cleared.

In theory, a corporate raider could make easy money by buying out any one of these companies, taking out its cash and selling off its assets. So why isn't anyone biting?

The simple answer is that shareholders realise this. Yap Wai Ming, director at Stamford Law, says many owners simply don't want to sell.

'This market is very artificial because the prices based on market value are out of whack with real valuations.

'In some cases, the prices are trading below the cash value of the company and on a break-up basis they can get even more,' says Mr Yap.

'It's about pricing expectations,' says a banker in a corporate finance firm. 'There's some (deal) structuring going on, but closing is not so easy.'

According to Thomson Reuters, withdrawn mergers and acquisition deals totalled US$394 billion in 330 deals so far this quarter - just US$44 million short of the level of completed mergers over the same period.

Then, there could be trouble with minority shareholders - a problem that has already hit Singapore Airport Terminal Services, which is paying S$334.5 million for a 69.7 per cent chunk of Singapore Food Industries.

'The proposed deal destroys value for SATS shareholders,' says Ong Chin Woo, a small shareholder. According to him, SATS is paying too much for SFI, and has failed to carefully evaluate the target's balance sheet and business risks.

With all these risks, 'it's not easy to get repayment, and especially with a public company, there's a lot of accountability,' notes the banker.

And in bad times, buyers have to be more careful with their due diligence work, says UOB Venture Management executive director Aw Chye Huat.

'They have to make sure that the potential investees could perform well in the downturn and will have enough cash to ride through the potentially long period of turbulence,' he says.

Takeovers are also easier to structure if buyers show a genuine interest in strengthening an already viable business, say industry sources.

For instance, YTL paid S$285 million in October for a controlling interest in Macquarie Prime Reit, and last month bought electricity generating firm PowerSeraya for S$3.8 billion. King's Safetywear, Courts Singapore, and Cityneon are among the other companies to have been bought over recently.

In many of these cases, there was a strong business proposition and synergy between buyer and target, notes an analyst at a foreign bank.

And even though a financial firestorm has sent valuations to historical lows, it's at the same time making takeovers harder to complete, because capital is hard to come by.

'The valuations are very attractive but you still have to pay a premium, and where are you going to get funding?' says the analyst.

Carmen Lee of OCBC Research says such problems could put off corporate raiders. 'If there is a viable business plan, bankers are more willing to lend. If you just want to asset strip, I don't know if you're a banker you would lend to them.'

And private equity isn't taking up the lending slack - according to Thomson Reuters, withdrawn private equity backed deals totalled US$61 billion this quarter, three-fold the level of completed acquisitions over the same period. Closed private equity deals are down for the sixth consecutive quarter, said Thomson Reuters.

While there have been few published successes - overall, just 29 deals worth US$504 million were recorded in October, a year-low, according to Dealogic - Mr Yap says deals are still there, only that people are taking their time.

'It's like a musical chair. The guy who stays close to the seat has a greater chance of winning when the music stops.

'There are still a lot of restructuring deals, RTO, opportunistic acquisitions in the pipeline but people are pulling back and watching each other.'

Meanwhile, growth capital firms like UOB Venture Management are seeing more opportunities away from the stock market spotlight. 'We are indeed closing more deals this year than last, when the market was hot and valuation high,' says Dr Aw.

And in any case, companies are not necessarily defenceless. 'If I were a CEO now, I would use the cash to buy up my own shares,' says OCBC's Ms Lee. Such buybacks have been picking up in recent months as companies - many cash rich after record profits in 2007 - seek to bolster share prices.