A tale of two SCR exercises


  • Business
  • Saturday, 22 Feb 2020

In CCB’s case, the IA did advise the disinterested shareholders to vote in favour of the SCR as the offer price of RM2.20 was reasonable based on several factors.

LAST week, an unexpected event unfolded following Cycle & Carriage Bintang’s (CCB) failure to obtain the necessary approval from uninterested shareholders for its proposed selective capital repayment (SCR) exercise.

As explained, CCB failed to obtain the required majority in numbers and 75% in value as those who voted for were just over 46% of the total number of voters, representing about 58% in total value.

Worse still, slightly over 13% of the total number of voters among the disinterested shareholders voted against the SCR resolution, which exceeded the 10% threshold necessary to ensure the plan goes through. Effectively, CCB’s plan to take the company private failed on all three counts.

A failed SCR is rather rare in the Malaysian context as most of the time, the offer price, although it may not be fair, is normally reasonable. In most cases, an independent advisor (IA) would assess the valuation and advise minority shareholders accordingly. In CCB’s case, the IA did advise the disinterested shareholders to vote in favour of the SCR as the offer price of RM2.20 was reasonable based on several factors.

First, the offer price was above the market price. Second, there was no competing offers on the table for disinterested shareholders to consider. Third, the offer price remained above the market price and fourth, the illiquid nature of CCB shares traded on the market.

Hence, the IA believed that the offer price should be accepted although the IA did reason that the SCR price is not fair, as it was below the estimated realisable net asset value (RNAV) of RM3.64 per share. The IA made no mention of the current net asset value (NAV) but even taking that into consideration, the offer price fell short by about 49 sen per share or 18% as CCB’s latest NAV is at RM2.69 against the SCR price of RM2.20.

The CCB board did not make any attempt to revise the SCR offer price higher despite news report that suggested at least one large disinterested shareholder was against the proposal as the offer price was deemed to be low.

Worse, CCB’s share price although was mostly trading at 5%-6% discount from the SCR price just days before the EGM, started to decline rapidly three trading days before the date of the EGM.

Could it be that some form of information was being made known to the market? After all, the disinterested shareholders who are proxy voters are required to submit their proxy forms 48 hours before the EGM. Judging by the fall in CCB’s share price from RM2.07 on Feb 5 to RM1.62 on the eve of the EGM, it seems to suggest that there was some form of market intelligence to suggest that the SCR would fail.

The academic question now is why didn’t the board raise the SCR price to at least near or matching the NAV price? Wouldn’t that appease the disinterested shareholders and allow the proposal to go through? After all, the offer price was not only at a discount to NAV but almost 40% lower than the RNAV. Shouldn’t CCB follow the footsteps of another SCR last year where the board raise the SCR offer price multiple times to ensure the proposal goes through.

This was the case of Selangor Properties Bhd’s (SPB) SCR whereby the board, which had initially proposed a price of RM5.70 per share, raised the offer price twice, to RM6.00 at first within two months of the original offer and to RM6.30 per share about a month later.

In SPB’s case, the offer was also not fair but reasonable as the NAV and RNAV per share of SPB stood at RM7.17 and RM8.28 per share respectively. Effectively, the higher SCR offer price made by the board to disinterested shareholders narrowed the discount to NAV and RNAV from 20.5% and 31.2% to 12.1% and 23.9% respectively.

It can be said that in SPB’s case, due to the improvement in the SCR price offered, the minority shareholders were pleased and voted strongly in favour of the proposal. At the EGM, SPB obtained 76% in number of voters and 99% in value and hence the SCR proposed was carried, as expected.

The above two cases of companies undertaking SCR show that they need to be mindful of what the minority shareholders are saying, both publicly or in consultation with the company.

While taking a company private, whether via the SCR route or even via a general offer, it is important to keep in mind that a corporate exercise costs money and is all well and good if all shareholders are happy with the offer price and walk away smiling, but a failed SCR case can be costly. Not only to existing shareholders but even to new shareholders who would have potentially bought the shares of the company on the basis that the SCR will succeed. That is why whenever an SCR is announced, the share price tend to quickly reflect the scenario.

However, should the SCR failed, the new shareholders who had bought the shares after the initial announcement could end up at the losing end. What is the next step after this for CCB? Would it make another attempt to take the company private?

Only time will tell, and hopefully at a much improved price than CCB’s failed SCR price of RM2.20 per share.

The views expressed here are the writer’s own.

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