News analysis

Taking a look at Temasek's bid to privatise SMRT

Of interest is Temasek's decision to propose a scheme of arrangement, rather than a general offer, to buy out SMRT

Singapore's stock market is witnessing an interesting trend. A number of high-profile companies have either delisted, or announced their intention to do so. However, no other company's proposed privatisation has generated as much interest as that of SMRT.

First, it is hard to find another publicly listed company that affects the lives of millions of Singaporeans on a daily basis. Second, the fact that Temasek Holdings is proposing to fully acquire SMRT adds another dimension to the interest level.

But the aspect that has been discussed the most among shareholders is the decision to undertake the proposed privatisation via a scheme of arrangement rather than a general offer. Over the past few weeks, the Securities Investors Association (Singapore), or SIAS, has received enquiries from shareholders regarding the offer.

Why a scheme of arrangement and not a general offer? There are various differences between these two. To see how these differences impact SMRT's proposed privatisation, it is important to understand Temasek's intentions. Temasek, which is already SMRT's majority shareholder, has stated that it is not looking to simply increase its shareholding further. Its desired goal is to take SMRT private and delist it. A scheme of arrangement is much better suited for that than a general offer.

No other company's proposed privatisation has generated as much interest as that of SMRT, as it is hard to find another publicly listed company that affects the lives of millions of Singaporeans on a daily basis.
No other company's proposed privatisation has generated as much interest as that of SMRT, as it is hard to find another publicly listed company that affects the lives of millions of Singaporeans on a daily basis. ST PHOTO: JAMIE KOH

This is true for both Temasek as well as retail shareholders. This is because a scheme of arrangement has a binary outcome. Simply put, it either succeeds or fails.

The biggest question around any proposed privatisation is whether the price offered is fair. Shareholders always want more, especially if they originally invested at a higher price. Temasek, too, has to take multiple factors into account while deciding how much it is willing to pay for a company.

Retail shareholders have an opportunity to cast their vote and decide whether they want to sell their shares or not and be part of a collective decision by the general body of shareholders. If the vote is successful, SMRT will be delisted from the Singapore Exchange. If it is not, SMRT will continue to remain a listed company with no change in Temasek's shareholding. It is important to note that Temasek cannot vote.

Under a general offer, there is a possibility that Temasek may see its shareholding increase further, but not enough for it to delist SMRT. That, Temasek has said, is not the desired outcome of this exercise.

At the same time, under a scheme of arrangement, SMRT is required to call a special shareholders' meeting, often termed the "scheme meeting". This is to give minority shareholders a platform to raise any questions about the proposed scheme, as well as to cast their vote to decide its outcome.

A general offer does not require any such meeting to be called and does not provide for shareholders to cast their votes as a collective body.

In a scheme of arrangement, Temasek cannot vote. One of the most important things to note is that for a scheme of arrangement to be successful, it needs to meet two distinct thresholds at the scheme meeting: number of shareholders voting, and the volume of shares represented.

It requires the approval of a simple majority of shareholders who are voting at the meeting, either in person or proxy. In addition, those voting in favour of the scheme need to hold at least 75 per cent in value of the shares that are voted at the meeting.

So not only does a scheme of arrangement give retail shareholders a platform to raise questions, clarify doubts and make an informed decision, it also ensures that their interests are not compromised.

The fact that the scheme of arrangement requires a further clearance from the High Court provides additional assurance that the interests of minority shareholders will be protected.

The biggest question around any proposed privatisation is whether the price offered is fair. Shareholders always want more, especially if they originally invested at a higher price.

Temasek, too, has to take multiple factors into account while deciding how much it is willing to pay for a company.

In this particular case, as stated in the scheme document, the offer price will not be increased.

I have always advocated that shareholders should pay close attention to the opinion of the independent financial adviser (IFA) on the price. The board of SMRT appointed a well-known international investment bank - Rothschild - as the IFA to opine on the terms of the offer, including the scheme price of $1.68 per share. The IFA has found the terms of the scheme to be fair and reasonable. The independent directors of SMRT concur with the recommendation of the IFA, and have unanimously recommended that shareholders vote in favour of the scheme. In addition, 10 equity analysts have recommended that shareholders vote in favour of the offer, and international corporate governance groups ISS and Glass Lewis have recommended the same.

In such a situation, it is important to put aside emotions and evaluate the offer based on the merits of the case - looking forward, not backwards. Comparing the scheme to historic value may not be a useful way of looking at the scheme if circumstances have changed markedly, as they have in this case.

If shareholders vote for the scheme and the scheme is successful, then they will be assured of the scheme price of $1.68 per share. If they vote against the scheme and the scheme fails, then there would not be a support in terms of the offer price to keep share price at the current level, and the market will be left to decide at what price the shares would be trading.

Temasek will have to wait at least 12 months before making a new offer, but that is if it decides to do so.

In addition, shareholders will need to understand how the company will continue to operate under the New Rail Financing Framework and its prospects.

Furthermore, SMRT has said that to be prudent, it plans to use a substantial part of the net proceeds from the proposed sale to retire part of its existing debt. Shareholders will have to accept that there is no special dividend, and both the company and Temasek reaffirmed this when they announced the scheme.

Shareholders are encouraged to read the IFA report in the scheme document, evaluate the case for and against and make a well-informed decision come Sept 29.

And those who cannot, or will not, attend the meeting should still consider submitting a proxy so that their voices can be heard on this important question.

One should not assume an outcome and not vote because of an assumption. Participation is a right and a responsibility of shareholders in a proposed scheme of arrangement, because the outcome affects all minority shareholders - even if they don't vote.

  • David Gerald is the president and CEO of Securities Investors Association (Singapore).
A version of this article appeared in the print edition of The Straits Times on September 26, 2016, with the headline 'Taking a look at Temasek's bid to privatise SMRT '. Print Edition | Subscribe