Published March 12, 2009

Depressed market changes takeover wisdom

By UMA SHANKARI

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IT'S common market wisdom that to succeed, a takeover bid has to offer an attractive premium.

But the outcome of the latest takeover bid in town should lead to a re-examination of this view.

Last week, UOL Group said that its $1.15 billion takeover offer for United Industrial Corp (UIC) had failed. At the time of the offer's close, UOL had garnered only 48.94 per cent of the voting rights in UIC; the offer was conditional upon UOL gaining control of more than 50 per cent of voting rights.

This means that UOL had to return the shares that it had obtained through the general offer - about 3 per cent - to shareholders. But it got to keep the 15 per cent that it bought on the open market or from institutional investors.

The popular reading is that the outcome was what veteran banker Wee Cho Yaw, who controls UOL, wanted. This way, he gets to raise his stake in UIC to more than what Filipino tycoon John Gokongwei (UIC's second largest shareholder) holds - without having to make an expensive offer for Singapore Land. Under the chain-rule principle, UOL would have been obliged to make an offer for UIC subsidiary SingLand at $3.57 per share had its stakeholding in UIC crossed 50 per cent.

But what is even more interesting than the outcome is how close the offer came to succeeding. Without even trying really hard, and offering a price that was widely seen as unattractive, UOL came close to gaining control of UIC.

In fact, the independent financial adviser appointed by UIC to evaluate the takeover bid had told shareholders that the offer price of $1.20 a share was 'not fair'. Usually, when an offer price is judged to be unattractive, the offer fails with the buyer's shareholding remaining more or less the same as before. Analysts also commented in this case that they do not expect much from the offer.

However, what transpired was that some shareholders decided to use the offer to exit their holdings in UIC. In particular, it emerged that UIC's then-third largest shareholder Morgan Stanley had sold about about 9 per cent of UIC shares directly to UOL.

And the actions of Morgan Stanley and other investors seem to indicate that they expect the outlook for the market here - and property stocks in particular - to worsen.

It also shows that unlike in the past, offering a large premium when making a bid for another company may no longer be needed in the depressed market - there are shareholders who are looking to cut their exposure even at a slight premium. This should offer opportunities for companies with cash on hand to buy up other companies that they have been eyeing for some time.

Before UOL's offer for UIC, the last takeover of a major property company in Singapore was done by CapitaLand, which in January 2008 paid a premium of 43 per cent to the last traded price to take its serviced residence unit The Ascott Group private. The offer price was also at a premium of about 145 per cent to Ascott's unaudited net asset value per share as at Sept 30, 2007. The market was just getting into a slowdown then.

But things have turned a lot worse since. In line with this, UOL's offer price for UIC was just 9.1 per cent higher than UIC's last transacted price of $1.10 at the time that the offer was made. The offer price was also some 51.6 per cent lower than UIC's net asset value per share of $2.48 as at Sept 30, 2008. Yet, the offer was enough to entice shareholders holding a significant chunk of the company to part with their shares - whether through the open market, by selling directly to UOL, or accepting the general offer itself. That, and what it means for future takeovers, is worth a headline all in itself.