Should We Be Concerned By The Spate Of Privatisations?

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I remember once having problems with a leaking tap. It wasn’t a particularly bad leak. It was an occasional drip that was more of an annoyance than a problem.

It wasn’t too difficult to resolve the problem. I would simply turn the tap that little bit harder to stem the leak. But over time, the tap had to be twisted increasingly tighter to achieve the same end.

Then one day, it didn’t work anymore. No amount to twisting would stop the water from flowing. The washer had been so badly compressed that it snapped. The only solution was to change the washer completely.

Something similar appears to be happening in the Singapore market.

Drip, drip, drip

Around two years’ ago a tiny droplet of privatisation appeared on the scene – CapitaMalls Asia was delisted from the stock market. The company, which, at the time managed 105 shopping malls, became a wholly-owned unit of CapitaLand (SGX: C31) in July 2014.

The privatisation came as a bolt out of the blue. But the 23% premium paid by the acquirer helped to soothe investor concerns.

Around six months later, another property company was privatised. This time, Keppel Land was acquired by parent Keppel Corporation (SGX: BN4). The acquisition, which was almost as surprising as CapitaLand’s earlier deal, was also completed at a premium.

More drips

The acquisition, which was intended to diversify the parent group’s structure, now appears prescient. It has probably saved the Singapore conglomerate from a worse mauling, following the sudden collapse of crude oil prices.

Just like my leaking tap, the gradual drip, drip, drip of privatisations has turned into a noticeable leak.

In recent times, the likes of Goodpack, Asia Pacific Breweries, Neptune Orient Lines, Tiger Airways and OSIM International have left the market.

Others that are either going private or have already gone private include SMRT, Eu Yan Sang International, Sim Liang Group. Recently, Super Group (SGX: S10) announced that it too has agreed to be bought by Dutch coffee company, Jacobs Douwe Egbert, at a premium.

Why float?

To understand why companies are privatised, we first have to look at why companies are floated on the stock market in the first place. The reasons are manifold. Some are perfectly valid, while others could be a little suspect.

Some of the more laudable reasons include raising capital from the market to pay down debt or selling shares to finance possible acquisitions.

Sometimes, a company might want to float to gain access to funds for use later on. Another reason could be to achieve a higher profile in the eyes of customers.

However, there can be less savoury reasons as to why a company might want to float too.

For instance, at the peak of booming oil prices, some companies might simply be cashing in on high commodity prices. Of course it can be argued that companies will want to float at the best possible time and price. Who wouldn’t?

Why delist?

But just as companies might have manifold reasons to float, there could lots of reasons as to why they might want to be privatised too.

One reason could simply be to cut expenses and paperwork. For some businesses, the cost of listing could simply be too high a price to pay. Another reason could be when the majority shareholders believe that the company has been undervalued by the market.

Similarly, a company could be privatised if another company also recognises that the undervaluation could present an opportunity to buy the business on the cheap.

Wrong reason

It is also possible that the company should never have been listed in the first place. It may have been listed for all the wrong reasons, which over time has become glaringly obvious to shareholders.

However, whilst the spate of privatisations may be concerning for some, we should not be unduly worried that the overall market is contracting.

The slow drip of privatisation is unlikely to turn into a full-blow gush. If anything, it should be seen as a sign that the market is functioning properly.

Collective opinion

At any one time, the market is made up of the collective opinions of many investors. So, who is to say that the collective view of the many is any less correct that the views of the few?

If you believe that a share is undervalued then put your money where your conviction lies. If you are correct, then either the shares will rise or the company could be the target of a privatisation, in which case, the shares will most probably rise too.

Let us also never forget that the stock market is a place where companies can go to raise capital. Consequently, a company that delists could easily re-list again when it needs access to funds.

A version of this article first appeared in the Straits Times.

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