Great Eastern shareholders who hold out on OCBC offer could face long wait for next exit

SINGAPORE - Minority shareholders of Great Eastern (GE) who are holding out for a better exit offer from OCBC Bank may be in for a long wait. How long?

Twenty years or so, if history is anything to go by.

This is the bank’s third attempt to privatise South-east Asia’s most established insurer with roots going back to the colonial era.

The first attempt, exactly two decades ago under then CEO David Conner, took the form of a share exchange of 0.976 OCBC share for one GE share, valuing GE at $12.10 a share. It turned OCBC from a non-controlling 48.8 per cent shareholder into a parent with an 81.1 per cent stake. Mr Conner tried again two years later but managed only to lift the bank’s interest marginally to 86.9 per cent.

In May, OCBC made another attempt to take its “wayward child” home with

a $1.4 billion voluntary unconditional general offer

for the 11.56 per cent stake in the insurer that it did not own. It said the move was aimed at strengthening OCBC’s business pillars of banking, wealth management and insurance, and optimising its capital to enhance shareholder returns. The bank added that the offer was in line with its strategy to solidify its wealth management leadership position to drive growth by capturing rising Asian wealth.

At $25.60, the offer represented a 36.9 per cent premium over GE’s last traded price of $18.70. It is also a premium of 38.6 per cent over the one-month period, 40 per cent over the three-month span and 42.4 per cent over the 12-month period up to and including the last trading date of May 9, 2024.

OCBC chief executive Helen Wong said the bank was not buying an insurance licence, but picking up the remaining stake in a company that has been in the bank’s stable for the last six decades. The point that went without saying was that comparing the premium the bank was paying with recent transactions, such as those of Aviva-Singlife, SCB Life-FWD and Sumitomo-Singlife, was misguided.

Indeed, with over 88 per cent ownership of GE, OCBC wasn’t seeking market entry or a controlling stake.

This week, OCBC is expected to receive acceptances to bring its shareholding in GE above 90 per cent, the threshold at which GE loses its free float, and that will trigger a suspension in trading of its shares after the close of offer on July 12, 2024. But do note that suspension in trading is not the same as delisting the counter.

Some activist minority shareholders are telling everyone to ignore independent financial adviser (IFA) EY’s recommendation to accept the offer on the grounds that waiting could lead to a higher offer after a period of time, a la the Boustead Singapore takeover in 2023 when Boustead

was forced to make a higher exit offer for Boustead Project

for minorities who waited patiently.

Well, it may not be so straightforward. This takeover is not exactly like the Boustead situation.

Under SGX’s rule book, a company will remain listed if two conditions are not fulfilled: one, there is a fair and reasonable offer; and two, the offeror has received acceptances from at least 75 per cent of independent shareholders.

Boustead had already received 75 per cent of total acceptances by the time its offer had closed.

OCBC has yet to do so, and by all accounts is unlikely to hit this threshold. This is because a group of legacy shareholders with a combined stake of over 3 per cent are expected to resist throwing in their shares. One of them, Mr Wong Hong Sun, who owns three million shares and whose grandfather S. Q. Wong was the legendary former chairman of Overseas Assurance Company, had told Bloomberg that he will not sell.

To reach 75 per cent acceptances, OCBC needs to hit 97.1 per cent in total shareholding. Without these legacy shares, it is impossible for the bank to cross the 97 per cent line to trigger an exit offer.

There is a very real likelihood that OCBC’s third takeover attempt for GE could end up in no man’s land of between the 90 per cent and 97 per cent range, and head into uncharted territory for the Singapore Exchange.

Here’s the thing.

If and when OCBC crosses the 90 per cent suspension point, SGX will halt trading of GE shares after July 12. But the counter will remain listed, assuming OCBC has not received 75 per cent acceptances to take its stake to 97 per cent.

At this point, those still holding GE shares will be in a limbo. They can’t sell because trading is suspended. They can’t get out because GE can’t delist in the absence of an exit offer for the remnant shareholdings. The campaign to extract a higher payout could instead lead to the prisoner’s dilemma of game theory, where everyone is hurt by a sub-optimal outcome.

People well-versed in the ways of Singapore Exchange Regulation (SGXRegCo) believe that the exchange is unlikely to countenance a prolonged period of suspension, and will likely agitate GE or OCBC to restore the free float. This could be via GE either issuing new shares or forcing OCBC to sell down to below 90 per cent, back to its pre-offer state of play.

But OCBC is on record as saying it will not be taking action to restore GE’s free float. This leaves the ball in the court of GE’s board.

It can issue new shares under a general share issue mandate which the board secures at every annual general meeting. Or it can even volunteer an exit offer for the remnant shareholders. Both options come with challenges for GE’s board, foremost of which is at what price to issue new shares, and who will take them.

Then there is the biggest bone of contention in the current takeover: the actuarial metric of EV or embedded value, which the arcane world of actuarial science uses to measure the worth of an insurer’s business. The EV of $36.59 has been much bandied about. Minority shareholders and EY have used it to slam OCBC’s unfair offer price of $25.60.

But what they might be missing is that the $36.59 number is based on GE’s own assumptions and projections on the future value of its in-force business, including assumptions of the risk discount rate.

OCBC shareholders may rightly ask why a buyer should go along with a seller’s view of the future. And as one actuarial wit pointed out, those EV assumptions are as fluid as the oil spill at Sentosa Cove. A mere 1 per cent change in the discount rate used in the GE’s calculations will result in a $1 billion change in EV.

More importantly, how fast will that $36.59 magic number disappear if OCBC starts charging the same bancassurance access fees that its rivals DBS Bank and UOB charge their insurance partners. DBS is reportedly paid $1.5 billion by Manulife and UOB $1.15 billion by Prudential in 15-year distribution agreements.

GE’s dissident minorities should be careful what they wish for. OCBC shareholders too can agitate for more.

In considering the fairness of OCBC’s offer, EY churned out derived values based solely on the $36.59 number. Whether this is fair and reasonable is subject to debate. In contrast, the last IFA, Morgan Stanley, in assessing the fairness of OCBC’s offer price in 2006, deployed a wider range of metrics.

Long story short, OCBC insists its offer price of $25.60 is firm and final. In other words, GE shareholders can take it or leave it. The bank’s board and management have their own shareholders to answer to as well.

For those holding out, it is now a game of “chicken”. Who will blink first?