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Should Investors Buy Into Privatisation Rumours?

With the flood of delisting and privatisation offers on the local bourse this year, it’s not surprising to hear of more such rumours circulating around larger blue chip names in recent weeks. The latest privatisation rumours are swirling around SIA Engineering Company Ltd (SGX: S59), or SIAEC, and Thai Beverage Public Company Limited (SGX: Y92), both of which have seen spikes in their share prices due to the persistent rumours.

Brokerage firms, seeing an opportunity, have also released thick reports on companies they believe may be taken private soon, leading to investors paying what is known as a “privatisation premium” for the shares. This premium accounts for the difference between the offer price and the share’s last traded price and usually offers a fat reward to investors who correctly identify a privatisation candidate.

Should investors buy into such rumours? Is this more than just hype?

Digging into the root causes

Let’s dig into the root causes of why such rumours might surface in the first place. SIAEC’s share price, net profit, and dividend have been on the decline for several years due to challenges in its operating environment and also a structural change in the industry. Thai Beverage saw its share price peak at around S$1.02 in August 2016, but it has since languished around the S$0.82 mark as growth has stalled.

Privatisation rumours arise because the market often views shares of companies that have undergone years of decline as being “cheap.” Another reason is that these companies may have a strong parent, such as Singapore Airlines Ltd (SGX: C6L) in the case of SIAEC. Analysts will argue that a case can be made for privatisation as the parent can retain all the profit from its subsidiary and also avoid the onerous costs of staying listed.

Explaining the hype

The hype then spreads to other companies that either have similar characteristics or are facing the same kind of business pressure SIAEC is. Brokers are always ready to promote a good story, and investors often start hearing of other potential candidates that may be privatised at a premium, presumably leading to instant share-price gains and quick profits.

Should investors hold out for privatisation?

I should caution against jumping in amidst the hype. Sometimes the media and other players start these rumours just to encourage churn in the shares of a company, and they may not have much substance attached to them. Investors who simply purchase a company’s shares without due consideration for its merits or risks will be doing themselves a great disservice, as the hype generated by the rumours creates an artificially inflated share price. Once the hype dies down, the share price usually either collapses or slowly drifts back down to reality.

New rules for privatisation

Singapore Exchange Limited (SGX: S68) also recently announced new rules regarding delistings, stating that these must be both fair and reasonable. In addition, offerors and parties acting in concert with them are to abstain from voting on the voluntary delisting proposal. These new rules will make it tougher for offerors to push through privatisation that’s “not fair but reasonable,” and they will hopefully prevent cases where minority shareholders feel bullied.

All of the above factors suggest that investors should take it slow and easy when they hear of privatisation rumours, and they should evaluate the basis for the rumours before deciding to commit their capital.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange Limited. Motley Fool Singapore contributor Royston Yang owns shares in Singapore Exchange Limited.