3 reasons behind the surge of privatisation in Singapore market

The past five weeks saw companies feasting on bid offerings.

According to CIMB, the Singapore market was gripped by a flurry of privatisations in the past five weeks. On 20 Jul, Heineken made a S$50/share offer for Asia Pacific Breweries (APB), which culminated in a counter-offer by the founding family of Thai Beverage and eventually an improved S$53/share offer by Heineken.

The final offer for APB, at a total consideration of S$5.6bn, was 54% over APB’s 1-month VWAP price. This represented a steep trailing 12-month P/E of 35.1x, reflecting tremendous scarcity value in an Asian consumer business as well as competitive interests.

Here's more from CIMB:

Shortly after Heineken’s first offer for APB, Suntory made a S$6.60/share offer to privatise Cerebos (1 Aug). Suntory already owned 83% of Cerebos, strangely keeping Cerebos listed for years even as the latter served as a cash cow for the parent. The privatisation was no surprise, though it took a long time in coming. Suntory merely needed to spend around S$300m to get its subsidiary out of the listed-entity chores. The offer premium was 23% of Cerebos’s last traded price, at 18x CY12 P/E.

On 27 Aug, PTT launched an offer for Sakari Resources (S$1.90/share). The offer was a 28% premium over its last traded price but only 9% over its 1-year VWAP. PTT will spend about S$1.2bn to take over the remaining 55% of Sakari it does not own. At S$1.90/share, valuations of 15x CY12 P/E are just slightly above Sakari’s historical 5-year mean of 14x.

While the privatisations of the two consumer names reflected the acquirers’ desire to consolidate their interests, we believe the offer for Sakari Resources was more a reflection of long-term value that the acquirer detected in Sakari’s assets. Its key shareholders have chosen to take the company private after poor coal prices recently decimated its stock performance.

Why the wave of privatisations? 

Some underlying global trends underpinned recent privatisations:

1) Corporates are generally cashed up or lightly geared after going through the Global Financial Crisis scare; they want to be prepared for the next crisis. In the western world, corporates are delaying expansion investments as the macro outlook is uncertain; their cash is piling up; likewise, in Asia. In Singapore, theaverage corporate net gearing is <25%, with most corporates systematically deleveraging in the last decade after the Asian Financial Crisis, partly aided by property divestments with the birth of REITs.

2) The attraction of more sustainable growth from Asian consumer businesses. The Asian consumer is highly valued as income is growing in the coming decade and household balance sheets are not stretched yet. Conversely, consumers in the developed world are likely to tighten their belts. 

3) Low valuations for cyclical business. As global demand turns down and industrial activity slows, commodity stocks have been suffering from overcapacity and worries of insufficient demand. Such scenario tends to change with time. Sakari’s privatisation offer taught us that poor prospects are by no means a sure-bet on underperformance. Holding companies and individuals in Asia have the means to take companies private if they deem their long-term prospects sound and valuations attractive, as they currently are.