Commentary

Slow drip of privatisation signals a healthy market

I remember once having problems with a leaking tap. It was not a particularly bad leak. It was an occasional drip in which a bead of water would form at the spout, every now and again. It was not 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 turned increasingly tighter to achieve the same result. Then one day, it did not work any more. No amount of 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. Around two years ago, there was a tiny droplet of privatisation that 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 in July 2014. The privatisation came as a bolt out of the blue. But the 23 per cent premium paid by the acquirer helped to grease the wheels of privatisation.

Around six months later, another property company was privatised. This time, Keppel Land was acquired by parent Keppel Corporation. The acquisition, which was almost as surprising as CapitaLand's deal, was also completed at a premium. The acquisition, which was intended to diversify the 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 a leaking tap, the gradual drip of privatisation has turned into a noticeable leak. In recent times, the likes of Goodpack, Asia Pacific Breweries, Neptune Orient Lines, Tigerair and Osim International have left the market. Others that are either going private or have already gone private include SMRT, Eu Yan Sang International and Sim Lian Group. And recently, Super Group announced that it has agreed to be bought by Dutch coffee company Jacobs Douwe Egberts.

Just like a leaking tap, the gradual drip of privatisation has turned into a noticeable leak. In recent times, the likes of Goodpack, Asia Pacific Breweries, Neptune Orient Lines, Tigerair and Osim International have left the market. Others that are either going private or have already gone private include SMRT, Eu Yan Sang International and Sim Lian Group.

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. For instance, at the peak of booming oil prices, some companies might simply be cashing in on high commodity prices to stage a successful stock market listing. Of course, it can always be argued that companies will want to float at the best possible time and price. Which company would not?

But just as companies might have manifold reasons to float, there could also be lots of reasons as to why they might want to be privatised. One reason could simply be to cut costs and paperwork. For some businesses, the cost of listing could simply be too high a price to pay. Another reason could be that the majority shareholders believe that the company has been undervalued by the market.

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

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 have become glaringly obvious to owners and shareholders.

However, while 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-blown gush. If anything, it should be seen as a sign that the market is functioning properly. At any one time, the market is made up of the collective opinion of many investors.

So, who is to say that the collective view of the many is any less correct than 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 privatisation, in which case the shares will most probably rise too. Let us also not forget that the stock market is a place where companies can go to raise capital. Consequently, a company that delists could easily re-list when it needs access to funds.

• This is a regular column on stocks and investing by David Kuo, chief executive officer of The Motley Fool Singapore.

A version of this article appeared in the print edition of The Straits Times on December 05, 2016, with the headline 'Slow drip of privatisation signals a healthy market'. Print Edition | Subscribe