Reverse Takeover Transactions (RTO Transaction) in Singapore
Happy Chinese New Year of the Goat to all my readers! This year looks bad on the economic climate for the second half of the year but this also means assets are getting cheaper valuations which means more RTO transactions may be in the pipeline. I been getting several calls on this. Further to my earlier post on Reverse takeover Transactions in Singapore, there have been several new RTO Transactions in Singapore and this write up will analyse some of the commercial considerations when structuring RTO deals.
As we write previously, in a IPO transaction, a businessman restructures some assets under a holding company and lists that holding company on the Singapore Stock Exchange.
In a RTO transaction, there is an existing listed company (the “Listco”) that has an existing asset (“Existing Business”) and the parties can carry out either one of the following:
(a) The Listco acquires the new business (which is usually unlisted) (“New Business”) and merges it with the existing business so as to achieve strategic synergies;
(b) The Listco acquires the New Business and the original major shareholder buys his Existing Business using a private company vehicle that he owns;
(c) Or if the Listco’s original business has been sold prior to the RTO, then the Listco will change name after the acquisition of the New Business to reflect the name of the asset acquired.
From the asset perspective
Some benefits of a RTO transaction from the perspective of the asset owner:
- An acquisition via an RTO allows the asset to be sold into a listed company and multiples that of profits as opposed to a mere discounted cash flow valuation that you may expect for a normal merger and acquisition;
- An acquisition via an RTO allows the owner of the asset to have liquidity (i.e. he can sell down part of his stake in the asset);
- A listed parent allows the company/group to borrow at a lower interest rate. In some transactions that we have done, the post IPO/listed entity can sometimes borrow at a much lower interest rate;
- From a China perspective, this overseas listing allow china business owners to move their money/assets overseas on a more fluid basis rather than having to do the usual 内保外贷 (pledge assets in china as security and then borrow offshore in Singapore);
- An overseas listing allows the China entity a reason to invest overseas and expand overseas from a china compliance perspective. The State Administration of Foreign Exchange (SAFE) (国家外汇管理局). This also grants the China entity a reason to move funds overseas to expand into foreign projects and also a good reason why funds should stay offshore. An overseas listing allows the group to raise offshore money and keep it offshore as well to do foreign projects;
- Once the group is large enough, a foreign listing allows the group to issue bonds and investors will have better confidence if the group is well run from a corporate governance perspective (which is done as part of the RTO/IPO process).
From the listed entity perspective – Why RTO
Some benefits of an RTO from the owner of a listed company:
- You get to realise value from your existing listed company shell;
- You can avoid having to pay money for additional compliance for a continued listing;
- If you find a good assets for your listed company, your existing shares held in the company may be worth more in the future.
An analysis of the listed company shells available in Singapore now
So if you have an asset that you think is sizable that you think you can inject into a Singapore listed company, the question then is what types of listed shells are available in the Singapore market? Here are some of my observations and each case is different so please seek investment advice for your particular situation:
|S/No||Types of Singapore Listed Shells||Some observations|
|(a)||Profitable company||This is typically expensive and pricing depends on whether a main board shell or catalist shell.|
|(b)||Loss making company (not on watchlist)||This is typically cheap but has a lot of liabilities so the asset that wishes to acquire this shell must be prepared to provide financial support for the underlying business.|
|(c)||Loss making company (on watchlist)||This is typically very cheap but has a lot of liabilities so the asset that wishes to acquire this shell must be prepared to provide financial support for the underlying business.
If the Company is on the SGX-ST watchlist there is a clock ticking (under the Exchange Rules) so the board knows that if it does not do a deal soon, it will be delisted and all the existing shares in the company would become worthless.
However incoming assets should note that SGX-ST is conservative so they would rather let a transaction die then let a bad asset be injected into a Singapore listed company as that would be bad for the investing public.
From the Listed Company perspective
Given the current “uncertain to downturn view” of some of my finance friends in respect of the global economy, the best assets for a RTO are defensive assets such as food and drink companies or assets of monopolistic companies like China State Owned Enterprises which typically are profitable and are not subject to major economic cycles. However from a practical perspective, RTO Transactions take a long time to complete and the incoming asset typically needs to be prepared to spend money on professionals and also put aside money to back the typically weak listed company. Thus, this leads me to the view that RTOs are useful for large conglomerates with deep pockets and can sit through the RTO process.
Why not list your company on the SGX-ST via an initial public offering?
Singapore in recent years sources IPO deals from several places. Many of the large assets/companies in Singapore have already been listed on the SGX-ST. The SGX-ST receives some applications each year from Singapore companies and does not need to do any business development in Singapore for listings.
Thus, it focuses its business development efforts for IPOs outside of Singapore. Many of these overseas listings in Singapore are from China, you may ask why? This is because CSRC (the China equivalent of MAS) has frozen IPOs for a long time in China and only recently allowed new IPOs into the China Market. Any Company that wishes to IPO outside of China needs to get approval from China Securities Regulatory Commission CSRC (中国证券监督管理委员会) (save for those that were restricted offshore in the early days). CSRC was last rumoured to have 400 applications for IPOs on its desks and that was before the IPO market was closed in China. Can you imagine how much backlog CSRC has to clear?
Thus, for liquidity purposes (the bosses of China companies want to sell their shares overseas, get cash out of China and then maybe retire overseas after the period of witchhunting following the Bo Xilai and Zhou Yong Kang arrests in China).
In conclusion, RTOs are set to stay in Singapore and it is really a shame that most of the large IPOs in Singapore in the last few years are Real Estate Investment Trust Deals.
Do you have any views on the feasibility of RTOs in this second half of 2015?