Two days ago, I attended a dialogue session organised by the Securities Investors Association of Singapore (SIAS) for minority shareholders to meet John Lim, founder and CEO of ARA Asset Management, to understand more about its recent privatisation offer.
A few of my friends and readers could not attend the dialogue session due to work and travel commitments. So if you’ve missed the session, let me share with you what I learned so you have better clarity on making a decision whether to accept or reject the offer at the upcoming scheme meeting on 23 March 2017.
The meeting started off with the standard corporate presentation on the privatisation offer. Thereafter, David Gerald president and CEO of SIAS, and John Lim took over the stage and kickstart the dialogue session with the shareholders.
Here are some key points shared by John Lim during the session:
- The offer price of $1.78 will not be raised as the Scheme of Arrangement works in a way that either the shareholders receive $1.78 per share or the deal is off. Under the takeover code, the Offeror cannot come back with another offer for twelve months if the Scheme fails to garner sufficient votes at the meeting. John Lim reminded every shareholder to be clear about this point.
- The Scheme of Arrangement can only be passed if two conditions are met: head-count vote must be more than 50% and share-count vote is at least 75%. If any one of the two conditions fails, the deal is off and ARA will not be privatised. If you are a minority shareholder, the head-count vote is going to be your best way of representation as each shareholder present on the day is eligible for one vote regardless of the number of shares owned. If you own one share, that is one head-count vote. If you own a million shares, that is also one head-count vote. So if you want to influence the outcome of the meeting, you are encouraged to attend the Scheme Meeting in person. This is your best chance!
- The equity to AUM ratio of ARA is around 1.6%. According to John Lim, the ratio is comparatively lower than any of the listed asset managers around the world with their average ratios hovering around 7%. This means that for every million dollars raised for fund management, ARA only needs to come out with seed investment of only $16,000. Such a low ratio is remarkable for fund managers. This is due to the fact that ARA has good sponsors (i.e. Cheung Kong and Straits Trading) supporting them. The question is: Can ARA continue to grow its AUM by relying merely on their sponsors? John Lim thinks it is unlikely. When the company reaches a certain size, ARA needs to be independent in its ability to grow its own AUM. Therefore more capital is needed.
- ARA’s seed capital requirement for new funds has gone up drastically. As the company ventures into the private equity (PE) industry, institutional investors of PE funds typically demand that the fund manager co-invest with them for better alignment of interests. In the past, the seed capital requirement was around 3% but that has gone up to between 10% to 15% today. In other words, if ARA wants to grow its AUM by a billion, the company needs to have a co-investment capital of around $100 million to 150 million. In the past, ARA could fund the initial seed capital internally but since that percentage has increased, the board has to raise the additional capital from somewhere else.
- Raising capital from the stock market is easier said than done. In late 2015, ARA issued rights to raise capital for its new fund and its stake in Suntec REIT. Shareholders who took up the rights at $1 have since benefited as the value of the new shares are already up by more than 70%. John Lim elaborated:
“Today everybody is happy. But at that point in time, I can show you some of shareholders’ emails. It was painful! I got some institutional investors scolding me. It is easier for retail investors to sign a cheque and give us the money but not easy for institutional investors because they have to sell some shares elsewhere to subscribe to the rights. So the institutional investors were not very happy.”
- ARA has to continue tapping into capital markets to grow its AUM whether the company stays listed or not. It is important to grow the AUM or the company will face the threat of hostile takeovers. Suntec REIT is one example where ARA, together with Straits Trading, moved quickly to become the sponsor of Suntec REIT when BlackRock tried to grow their stake in the REIT back in 2014/15. John Lim and his team have made sound decisions for the long-term success of ARA by defending their positions and continuously widening their economic moat.
Essentially, the dialogue session presented multiple points to prove that the offer price is fair and reasonable. One notable shareholder, however, boldly brought up a differing comment.
His first point: “Being a business owner, we do not look at present value. We look at the value in the future. At $1.78 a share, it is fair value now but it is not moving forward.”
His second point: “We hear that the company needs a lot of money to grow to avoid a hostile takeover. Therefore, ARA and the parties are doing the right thing. But at the end of the day, I said to myself, they are doing the right thing but where is my benefit? Isn’t there is a way we get the two parties (Warburg and AVIC) to join and we can still be involved? I am prepared to dilute my holdings because I am a long-term investor. Besides, ARA has shown a good track record in the past.”
Lim responded that the incoming investors are comfortable paying $1.78 because they expect ARA to grow further in the future or they wouldn’t be paying that price. Everyone wants to make money and they think that $1.78 is basically the “full” value. Again, everyone sees value differently but Lim said that if Warburg and AVIC were to come in and ARA stays listed, the company’s free float may drop to as low as 20%.
Another shareholder wanted to clarify the rules of the scheme meeting: “For the scheme to work, you need to have a 50% head-count vote and a 75% share-count vote. What happens if you have one but not the other?”
David Gerald took over the question and explained that the scheme will fail.
The shareholder continued: “Is that likely to happen?”
David candidly replied: “I don’t know. God knows. Next question please.”
Whereupon the whole room burst into laughter.
There were other questions raised during the meeting but the key points on the reason for privatisation have already been addressed in this article. If you personally have any questions, it would be better for you to attend the scheme meeting in person on 23 March 2017, 11 a.m. at Suntec Convention Centre to ask the management directly. If you can’t attend, you can appoint a proxy on your behalf but the proxy form needs to reach the share registrar’s office by 21 March 2017, 11 a.m. (Singapore time).
Our stand at The Fifth Person remains unchanged and we will vote against the deal. I have previously shared my rationale and if you are interested to know more, you can always read my article: Why we are rejecting ARA Asset Management’s privatisation offer.
So, should you vote for or against at the scheme meeting?
Before you answer that question, here’s what you need to know and understand. If the scheme goes through, ALL existing shareholders (even if you voted against) will receive a buyout price of $1.78 per share. Moving forward, we will no longer have any interest in ARA.
If the scheme fails, ARA will remain listed and it’s business as usual. However, whenever ARA needs more capital, it will raise through an issuance of rights or placements to accredited investors to grow its AUM in the future.
The question to ask yourself is: Will you be ready to subscribe to new shares if/when that happens?
It is important to show our support to ARA whenever they need the capital to grow their AUM. After all, if John Lim and his team can continue to reinvest our capital at an attractive rate of return, we shouldn’t mind taking up the new shares even if it means having our stakes getting diluted together.
Ultimately, as a shareholder, this is the question you need to ask yourself.
The choice is yours.