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At OCBC’s annual general meeting on Apr 17, chairman Andrew Lee left no doubt that the banking group has been unmoved by calls for it to distribute its stake in Great Eastern Holdings (GEH) to its shareholders.
“(We) are not blinking,” he said, after reiterating OCBC’s longstanding position that its insurance unit is a significant source of earnings, and provides the group with a unique competitive advantage in the wealth management field.
Lee also defended OCBC’s miserly offer price of S$25.60 per share for GEH last year, saying it was based on work done by its investment bankers. “We paid millions for the advice,” Lee noted.
There is no point in continuing to argue about it, though. The more important question is how the impasse between OCBC and GEH can be resolved, and how investors should position themselves.
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Lee refused to delve into this question at OCBC’s AGM. “It’s price sensitive,” he noted. “Great Eastern may be suspended, but OCBC is alive and kicking on the SGX – the price moves on news.”
Yet, OCBC’s unwillingness to blink on its plainly-stated objective of keeping GEH in its fold, and its seeming aversion to paying much more than S$25.60 per share for the remaining stake in the insurer, could offer some clues on how things will eventually be sorted out.
Alternative path to delisting
Before going any further, some background might be useful.
OCBC’s offer for GEH last year at S$25.60 per share did not satisfy the two key conditions for a voluntary delisting. GEH’s independent financial adviser did not find the deal to be “fair and reasonable”; and the offeror did not obtain an acceptance rate of at least 75 per cent.
GEH has been suspended from trading since July last year, because less than 10 per cent of its shares were left in the hands of the public. OCBC currently has an interest in 443.7 million GEH shares, representing a 93.75 per cent stake in the insurer.
As a public-listed company, GEH is expected to comply with the minimum free float rule. It has until May 25 to come up with a plan, assuming no further extensions of time are granted. GEH said on Mar 28 that it had appointed Merrill Lynch (Singapore) – known as BofA Securities – as a financial adviser to help explore various options.
On the face of it, the simplest solution would be for OCBC to make another offer for GEH. Yet, it seems unlikely that OCBC is prepared to pay a high enough price to win over GEH’s remaining minority investors.
OCBC’s offer last year was priced at a 30 per cent discount to GEH’s embedded value as at end-2023 of S$36.59 per share; and it achieved an acceptance rate of only 46 per cent. GEH’s embedded value at end-2024 stood at S$38.08 per share.
What other options are available? One alternative I keep hearing about is for GEH to delist via a selective capital reduction exercise.
Under such a deal, GEH would cancel the shares held by its minority shareholders in exchange for a cash payment. OCBC would end up owning 100 per cent of the insurer, without having to make another offer.
Some investors have pointed out to me that it would be GEH’s board, rather than OCBC’s board, that would be responsible for leading a capital-reduction exercise, and ensuring that the insurer’s minority shareholders are adequately compensated.
Among Singapore-listed companies that have recently gone private via this route is Best World International.
A possible sticking point is that many GEH minorities want their shares to be priced at close to embedded value. Purchasing the nearly 29.6 million GEH shares that OCBC does not already own at S$38.08 each would cost nearly S$1.13 billion.
At end-2024, GEH held total assets worth more than S$113.9 billion, and shareholders’ equity of S$8.69 billion.
Speculating on a deal
How can investors speculate on the possibility of a selective capital-reduction exercise at GEH with its shares currently suspended?
One option is to look at shares of Kuala Lumpur-listed Sungei Bagan Rubber Company – which owns plantations, real estate and a pile of GEH shares.
Last year, Sungei Bagan acquired most of the assets and liabilities of another Kuala Lumpur-listed company, called Kuchai Development, in exchange for new shares. Kuchai subsequently distributed the Sungei Bagan shares it received to its own shareholders.
Among the assets Sungei Bagan acquired from Kuchai under the deal were more than 3.03 million GEH shares. Sungei Bagan already held more than 1.73 million GEH shares before the transaction. GEH’s latest annual report listed Sungei Bagan as its second-largest shareholder, with a holding of nearly 4.77 million shares – representing a 1.01 per cent stake.
Sungei Bagan’s usually thinly traded shares ran up in May last year, as OCBC unveiled its offer for GEH at S$25.60 per share. They closed last week at RM5.64 – putting Sungei Bagan’s market capitalisation at RM524.1 million, or about S$157.4 million.
Based on OCBC’s offer price of S$25.60, the GEH shares held by Sungei Bagan would be worth nearly S$122 million – or 77.5 per cent of the company’s entire market capitalisation.
If its GEH stake were to be valued at its embedded value of S$38.08 per share, Sungei Bagan’s stake in the insurer would be worth nearly S$181.5 million – or 15.3 per cent more than its current market capitalisation.
Investors should tread carefully, though. If there is no resolution to GEH’s trading suspension soon, Sungei Bagan could turn into a value trap.
The writer owns shares in Great Eastern and OCBC
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