OCBC’S offer for Great Eastern is about responding to minority dissent, doubling down on its strategy
Deal may bring early end to the public conversation about how the two entities could be better run for minority investors
THIS column said last week that OCBC had three options to address the undervaluation of Great Eastern’s shares: it could organise a sale of the insurer, distribute a major portion of its stake to its own shareholders, or try once more to buy out all the insurer’s minority shareholders.
On Friday (May 10), OCBC unveiled a voluntary unconditional cash offer for all the shares it does not already own in Great Eastern, at S$25.60 per share.
This option hews closely to the bank’s longstanding narrative about Great Eastern being a strategic pillar of the group. In the short term, however, it may accentuate the fundamental misalignment of interest between OCBC and Great Eastern’s minority shareholders.
Great Eastern shares have languished for so long, and were trading so far below their intrinsic value, that the current offer price is bound to be a point of contention between OCBC and the insurer’s minority shareholders.
Even if OCBC improves its offer price in the weeks ahead, it seems unlikely it will be pushed high enough to leave Great Eastern’s long-suffering minorities feeling entirely satisfied.
The lender already holds 88.4 per cent of Great Eastern’s 473.3 million shares. Purchasing the remaining shares at the current offer price will cost about S$1.4 billion.
OCBC said this additional investment in Great Eastern will enhance its own return on equity (ROE) and optimise its common equity tier-1 (CET1) capital adequacy ratio.
One factor that clearly prompted it to take action now is the growing disgruntlement with the undervaluation of the insurer’s shares,
which was beginning to raise questions about OCBC’S own strategy.
OCBC’S offer for Great Eastern is arguably as much about responding to the discontent with the insurer’s weak share price as it is about doubling down on its own strategy.
On a pro forma basis, subsuming all of Great Eastern would tighten OCBC’S 2023 CET1 ratio from 15.9 per cent to 15.3 per cent, and lift its 2023 ROE from 13.7 per cent to 14 per cent.
OCBC reported its results for Q1 2024 the same day it announced its offer for Great Eastern. Its earnings came in at S$1.98 billion, up 5 per cent year on year and 22 per cent quarter on quarter.
IFA key to delisting
OCBC’S offer price for Great Eastern is not compelling, in my view. While it is 36.9 per cent above Great Eastern’s last traded price before the offer was announced, it is 30 per cent below the insurer’s embedded value as at Dec 31.
Great Eastern is, however, very close to breaching the free float requirement of having at least 10 per cent of its shares in the hands of 500 members of the public. If the free float requirement is not met, trading in Great Eastern’s shares may be suspended.
OCBC has stated it intends to
seek a delisting of Great Eastern in the event the free float requirement is not met. The lender needs to acquire only 7.4 million more shares in Great Eastern to push its stake in the insurer above the 90 per cent threshold.
Much really depends on whether the independent financial adviser (IFA) engaged by Great Eastern assesses OCBC’S offer to be “fair and reasonable”.
Singapore Exchange Regulation (SGX Regco) said in 2019 that it would allow a company that is the subject of a general offer to delist only if the general offer is “fair and reasonable”, and the offeror has obtained at least 75 per cent of the shares held by independent shareholders.
Last year, trading in shares of Boustead Projects was suspended after an offer from Boustead Singapore left it in breach of the minimum required free float. The IFA
appointed by Boustead Projects deemed the final offer at S$0.95 per share to be “not fair but reasonable”.
At the direction of SGX Regco, Boustead Singapore subsequently made an exit offer for Boustead Projects at S$1.18 per share.
Market discipline
This column previously said one reason IFAS have waved through many seemingly inadequate offers – for instance, offers for real estate companies at steep discounts to their net asset value (NAV) or revalued net asset value (RNAV) – is because they did not use an appropriate valuation basis for publiclisted companies moving into the private market.
Once a property company is taken private, it would be valued by investors and financiers on the basis of its NAV or RNAV. Offering to buy out minority shareholders of such
a company at a big discount to these metrics would be plainly unfair.
By the same token, once Great Eastern is taken private, it would be valued by its owner on the basis of metrics such as embedded value or appraisal value. An offer to minority investors that values Great Eastern at a big discount to these metrics seems unfair to me.
The IFA that Great Eastern appoints should perhaps also critically examine the reasonableness of the offer from OCBC. For instance, it should look into the likelihood of more value being unlocked for Great Eastern’s shareholders via other means.
This brings me back to OCBC’S three options to address the undervaluation of Great Eastern’s shares. These were among many ideas that sprang up as the insurer’s minority shareholders began getting restless.
Over the last several weeks, a public conversation about how OCBC and Great Eastern could be better run for the benefit of minority investors has gradually widened.
Earlier this month, a letter to The Business Times from an OCBC shareholder argued that Great Eastern should not be absorbed in its entirety. The bank made a quick and detailed reply.
It would be a pity if OCBC’S offer for Great Eastern were to bring this conversation to an early end.
Being subjected to such market discipline can be uncomfortable for corporate boards, but it may lead to shareholders of public-listed companies being better served.