SC Global Privatisation

Straying slightly away from straight property market commentary, I’d like to weigh in on Simon Cheong’s bid to take SC Global private. For those who haven’t been paying attention to the news, here are the terms of the offer:

The all-cash General Offer price is $1.80, representing:

49.4% premium to the last transacted price before the announcement; and
39.5% premium to the highest closing prices in the 12 months prior to the announcement.

Reasons given for privatisation were the usual generic few: low liquidity, no requirement for market access, management flexibility and savings on listing costs.

Other than the reasons above, analysts also pointed to the following:

1. Discount to RNAV
The RNAV (Revalued Net Asset Value) is an estimate of the value of the company, and as such, due to different assumptions made, can vary quite significantly. RNAV estimates by various analysts range from $1.98 per share to $4.00 per share. Regardless, the $1.80 offer price is a discount to the RNAV.

2. Impending tax bill
As a listed company with foreign shareholders, SC Global’s projects have to comply with QC conditions, meaning that they have to develop their properties within 5 years of land purchase and sell the properties within 2 years of TOP. A large bulk of SC Global’s inventory are coming due to the time limit starting next year. The tax bill for 2013 was estimated to be in the region of $72 million, which may be saved should the privatisation bid succeeds.

Now for the plot twist:

Wheelock Properties, a subsidiary of Hong Kong group Wheelock and Company, holds about 16% of SC Global at cost basis of around $2.35 a share. Basically, if Wheelock doesn’t sell, there is no point in the whole exercise, since privatisation will fail if Wheelock applies to SGX to consider their shareholdings part of the free float. Even if privatisation succeeds, SC Global will not be able to reap any tax savings since Wheelock is a foreign shareholder.

To make the plot even twistier, Wheelock bought 1,066,000 shares last week at $1.81 to signal Simon Cheong that they weren’t happy with the buyout price. The share price subsequently shot up on hopes of Simon Cheong increasing his offer price. This was a artful move by Wheelock as the takeover code prevents Simon Cheong from buying above the offer price. This stops Simon Cheong from creeping closer towards the 90% mark.

So, here is the risk/reward scenario:

Simon Cheong may subsequently increase his price, so there may be potential upside of buying the shares now. If I had to guess, I’d say that anything below their cost basis will not be palatable to Wheelock.

If Simon Cheong doesn’t increase his price, then the privatisation will fail. Once the offer lapses, the share price may fall back to the $1.20 level, where it was before the offer.

There is a third scenario, where Wheelock and Simon Cheong cooperates to bring the company private. Once it’s private, they can negotiate a separate deal. In this case, the share price will drop back to $1.80.

So, given the above scenario, with the usual caveat emptor disclaimers, I suggest that if you’re holding SC Global shares, you have the happy choice to sell at a premium to the offer price or wait and see for now, until Simon Cheong’s next move. If you’re not holding any shares right now, I don’t recommend going in at this time as you’d have potential downside to $1.80 or lower.

Disclaimer: I’m not a qualified financial advisor. All information and/or advice you may get from the post is at your own risk. I own shares of SC Global at a lower price point than the offer price.

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