Should Investors Be Happy About The Privatisation Offer For OSIM International Ltd?

For those unaware, shares of luxury massage chair retailer OSIM International Ltd (SGX: O23) have been placed under a trading halt since the morning of 2 March 2016 before the trading session had started that day. (OSIM’s shares are still under a trading halt as of the time of writing, 1:40 pm.)

The reason for the halt was made clear this morning in an announcement: Ron Sim, OSIM’s founder/chairman/chief executive, wants to take the company private. Sim, who currently owns 68.31% of OSIM, has made a cash offer for the company’s shares that he does not yet control at a price of S$1.32 a pop.

According to the offer document, Sim’s buyout price is 31.8% and 33.5% higher than OSIM’s volume-weighted average price per share for the month and three-months ended 29 February 2016, respectively. The buyout price is also 18.9% higher than OSIM’s closing price of S$1.11 on 29 February 2016 itself.

The company has termed the price of S$1.11 and 29 February 2016 as the “Unaffected Price” and “Unaffected Date,” respectively. Investors may want to note that OSIM’s shares had spiked by 10.4% to S$1.225 on 1 March 2016, an event which prompted a query by bourse operator Singapore Exchange.

What should investors of OSIM make of this offer?

Sim’s offer price values the entire OSIM at S$980 million, 19.7 times its trailing earnings, and 4.4 times its tangible book value.  Given the huge 50% decline in the company’s net profit in 2015, some investors might view the company’s price-to-earnings ratio at the takeover price to be inflated. But if we look at OSIM’s peak earnings of S$102.2 million that happened only back in 2014, Sim’s offer price will value the company at merely 9.6 times the peak earnings.

According to the privatisation document, the offer would allow minority shareholders of OSIM “to realize their investments in the Company for a cash consideration at a significant premium above the historical market share prices… amidst challenging market conditions.”

But, the same document also stated that the offeror – that is, Sim – has no “current intention” to make any major changes to the company once it is privatized. Moreover, despite a poor earnings performance in 2015 as mentioned, OSIM is still generating positive cash flow and has a strong balance sheet (OSIM had a net-cash position of S$172 million at end-2015). So, from an operational point of view, I don’t see much reasons why OSIM would need to be taken private at this point in time.

Foolish Summary

The privatisation offer for OSIM does not look to be a bad one for minority shareholders of the company based on traditional metrics such as the trailing PE ratio.

But, investors may want to think about the following question: If Ron Sim has no plans to make any major changes to the company after taking it private, could it be possible that he views the firm as being massively undervalued at the offer price?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own shares in any companies mentioned above.