Published March 11, 2009

Chartered should just go private

By R SIVANITHY
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SO another listed Temasek- linked company has turned to shareholders for a cash infusion. Chartered Semiconductor is taking the same path that DBS Group and CapitaLand took last month. The difference, however, is that although DBS's and CapitaLand's rights issues were not well received by the market - both stocks are now well below their theoretical ex-rights prices - the two TLCs are at least viewed as being reasonably competitive and operating in commercially viable businesses.

The same cannot be said of Chartered, whose track record of mainly losses since listing about a decade ago does not instil much confidence among investors and shareholders.

The immediate question is, of course, whether the current rights issue will go the way of its 2002 predecessor and end up being taken up almost entirely by Temasek, which from the looks of it, is a distinct possibility.

This then leads to the bigger question - should Chartered remain listed, given its near-decade-long struggle to break even in a hugely competitive and capital-intensive industry that is faced with the worst global recession in decades?

Back in September 2002, Chartered sought to raise US$633 million via an 8-for-10 rights issue that was priced at $1 at a time when the stock was trading at $2.10.

The discount was a seemingly generous 52 per cent and Chartered said that the money would strengthen its balance sheet, reduce its debt-equity ratio and inject liquidity into the stock - pretty much the same reasons given for its latest rights exercise.

Despite the large discount (or perhaps because of it) the September 2002 exercise flopped badly and was rightly described as a disaster (the company was also rapped by the Singapore Exchange for the manner in which disclosure was handled, but that's a different story) - minority shareholders subscribed to only 4 per cent of the offer, leaving Chartered's parent Singapore Technologies with 60.5 per cent and underwriter Merrill Lynch with about 35.5 per cent (about US$220 million). Among the reasons given for the failure were poor timing and longer-term concerns over the company's ability to catch up with Taiwanese rivals.

Almost exactly the same features can be found in the current exercise - for instance, just as in 2002, the 27-for-10 rights are priced at a large discount (seven cents versus 20.5 cents) though this time the figure of 66 per cent is even deeper than before. Also, as was the case back in 2002, the exercise has come in for near-universal criticism and the shares have collapsed - for essentially the same reasons as before.

Analysts have concluded that the US$300 million that Chartered is hoping to raise will only provide temporary relief for the company's problems. DMG & Partners for example, asked in a 'sell' call how long the money could last and pointed out that the company has been suffering negative free cash flow for most parts of the past 11 years. It expects Chartered to incur negative free cash flows of US$251 million in the next two years.

DBS-Vickers, in the meantime, also called a 'sell', saying that the US$300 million will only serve to buy time. The broker also voiced concerns over Chartered's ability to successfully compete with its rivals that are deemed to be financially stronger.

Finally, CLSA also called a 'sell' and said that the company has left shareholders stuck between a rock and a hard place - be diluted or give the company money to burn.

It estimates that Chartered will use up the money in 12 months but perhaps more importantly, CLSA estimates that if Temasek ends up with its maximum allocation, its holding will increase from 59.4 per cent to almost 82 per cent - 'effectively a semi-privatisation'. Perhaps diplomatically, CLSA didn't ask the next logical question, which is - why not go the whole way?

Following a 39 per cent loss yesterday in the wake of the rights issue announcement, Chartered's shares have now collapsed 50 per cent in two trading days. The message from the market - as it was six years ago - is clearly not positive.

After 10 years of mainly struggling against the odds, maybe it's time to heed this message and call it quits rather than prolong the agony for long-suffering minorities.