Monday 2 November 2009

Shadow of protectionism in SGX’s stand on Li Heng

The aborted ‘back-door delisting’ of Li Heng Chemical Fibre may be a closed chapter as far as the Singapore Exchange (SGX) is concerned. But to many market players, the episode remains a talking point, and still raises many questions in its wake.

2 comments:

Guanyu said...

Shadow of protectionism in SGX’s stand on Li Heng

By VEN SREENIVASAN
02 November 2009

The aborted ‘back-door delisting’ of Li Heng Chemical Fibre may be a closed chapter as far as the Singapore Exchange (SGX) is concerned. But to many market players, the episode remains a talking point, and still raises many questions in its wake.

Essentially, the controlling shareholders of Li Heng Chemical Fibre, an S-chip, had proposed to transfer the assets of the company and relist them in another entity in Hong Kong, while leaving the listed shell company in Singapore.

But it all came to nothing when, in a statement to shareholders early last month, the company said that the SGX had opposed the move because when ‘viewed in their entirety’, the exercise would effectively result in the delisting of Li Heng and leaving a ‘completely hollowed out’ entity in its place on the local bourse.

‘For this reason, the proposed transactions do not comply with the listing rules,’ Li Heng said in a statement. ‘The company will be required to comply fully with all the provisions on voluntary delisting should it choose to proceed with the proposed transactions.’

The announcement, carefully worded, came as a surprise, given that Li Heng’s advisers included an experienced team from DBS Bank, with BNP advising the company in Hong Kong, and major law firms Allen & Gledhill and Rajah & Tann also in the mix.

So what went wrong?

Delistings in themselves are not uncommon. But the normal route has been a general offer made by a third party to shareholders. The rules, however, appear silent on the form of delisting that was proposed in Li Heng’s case.

Li Heng had some $300 million in the kitty, and it planned to use some $160 million of this to buy out shareholders at 42 cents a share. And those who did not want to exit had the option of picking up the stock on the Hong Kong bourse instead.

The entire exercise was subject to shareholders’ approval. Given that the proposed offer price was at a significant premium to the prevailing stock price, it would seem probable that most Li Heng shareholders - especially the small shareholders - would agree to the deal.

But the objection by the SGX meant that the shareholders of Li Heng never got their chance to vote on the offer.

One thing is obvious - the SGX does not want shell companies listed on the exchange. The exchange was probably also worried that allowing Li Heng to go ahead with its ‘back-door delisting’ would open the floodgates for others - especially undervalued S-chips - to follow suit.

This isn’t a misplaced concern. Recent scandals and negative newsflow involving S-chips have turned off investors, leaving many of these stocks languishing at bargain basement valuations.

Also, size matters. And that is where Hong Kong has the edge. The territory’s bourse is, after all, one of the biggest and most liquid exchanges in Asia.

Many companies heading to Hong Kong do so because they believe that they would get better valuations there.

Guanyu said...

This is why a number of Singapore-listed companies have been eyeing a dual listing in Hong Kong. But as analysts point out, the process can be tedious, messy and fraught with uncertainties. So the folks controlling Li Heng, and their advisers, probably figured that they had hit on a winning formula that would eliminate much of the hassle while offering shareholders an exit opportunity. What they did not bargain for was the objection from the SGX.

Yet, it may be fair to ask whether the SGX, in scuttling the deal, was protecting its own interests as an exchange at the expense of the interests of the shareholders of Li Heng and the company itself.

Perhaps it might have been better for the SGX to let Li Heng shareholders vote on the offer. Instead of blocking the deal altogether, it could have required the company to wind up its Singapore shell properly, either via a third-party offer or going through the normal delisting process. It could also have facilitated Li Heng in disposing a ‘clean’ shell via a back-door listing for other entities eyeing the Singapore bourse.

SGX may have put down an attempt by one company to pull out of Singapore and run to Hong Kong. But unless the local market becomes more attractive for these companies, it will not diminish the desire to bolt.

At the end of the day, the SGX has to compete on merit. Protectionism, no matter how well disguised, will not succeed in the face of competition from Hong Kong, Shanghai or any other bourse. Instead, it may simply turn off potential listing candidates.