W Capital Markets, the independent financial adviser to the privatisation offer of Sinarmas Land, has defended its work against criticisms from the investors' association.
In its May 5 statement that describes the 31 cents per share offer by the controlling Widjaja family as "exploitative", the Securities Investors Association (Singapore) questions the methods applied by W Capital Markets in forming its view that the offer is "not fair" but "reasonable".
In response, Wayne Lee, executive chairman of W Capital Markets says that the adopted methodologies in our IFA Letter are consistent with widely accepted industry practice and professional standards in Singapore.
"Whilst we acknowledge that no single method of valuation will be met with universal acceptance, the board of W Capital Markets would like to put on record and assure the independent directors that we have always been mindful and use our best endeavours to ensure that we exercise due care, skill and professional judgement in all advisory engagements and firmly believe that our IFA opinion in respect of the offer is supported by reasonable grounds and assumptions," says Lee.
"Many shareholders have expressed unhappiness on the recent voluntary unconditional cash offer made for Sinarmas Land, which is widely seen to be 'lowball' and therefore exploitative. SIAS shares their view," says David Gerald, founder, president and CEO of SIAS on May 5.
"SIAS calls upon the offeror to make a revised offer that is fair, reasonable and closer to the net asset value per share of 85.1 cents," he says.
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Besides flagging the RNAV of Sinarmas Land, Gerald questions why the IFA assumed a "holding company discount'' of 20-22%.
What is "particularly concerning" in the IFA report, he adds, is that Sinarmas Land's remaining assets, carried at $972.5 million on the books and revalued to $1.2 billion, were valued at only $757.9 million in the sum-of-the-parts (SOTP) analysis done by the W Capital Markets.
In his response on May 6, Lee says the RNAV may not be a realisable value as the disposal values of such assets are likely to vary depending on the prevailing market and economic conditions.
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Also, the RNAV computation does not take into account the time value of money, legal and professional fees, liquidation costs, other potential duties, contractual obligations, regulatory requirements and availability of potential buyers, which would theoretically lower the RNAV that can be realised.
In addition, all the comparable companies in Indonesia, except for one, and all comparable Singapore companies, are trading at a discount, and that previous privatisation deals of property companies deemed to be fair and reasonable were also at a discount to RNAV.
Lee says it is a "commonly accepted practice" to apply a holding company discount when valuing firms using a sum-of-the-parts methodology.
This is to "reflect the true market perception of the risks and challenges associated with owning a holding company" such as additional corporate expenses at the holding company, tax implications relating to dividend or capital distributions from the subsidiaries to the holding company, as well as investors' potential lack of control over the underlying assets and their reduced marketability.
Sinarmas Land, as a pure investment holding company with diverse assets, has no immediate control over the assets owned by its Indonesia-listed subsidiaries which are managed separately with independent governance structures, says Lee.
As such, he deems it appropriate to apply a holding company discount and it is the firm's "professional judgement" that the holding company discount of 20%-22% is reasonable.
"The application of a holding company discount to the SOTP is a totally different concept, distinct and separate from the valuation methodology used to value the remaining unlisted assets, and hence, we strongly disagree with SIAS's view that there is double discounting of the remaining unlisted assets," adds Lee.
