OCBC offers to privatise Great Eastern. What should shareholders do?

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By Gerald Wong, CFA • 28 Jun 2024 • 0 min read

OCBC announced a voluntary unconditional general offer for the 11.56% stake in Great Eastern Holdings Limited (GE) that it did not own at an offer price of S$25.60 per share.

ocbc great eastern geh offer
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What happened?

Many investors in Singapore have been watching OCBC’s offer for Great Eastern (GE) closely.

Earlier, OCBC announced a voluntary unconditional general offer for the 11.56% stake in Great Eastern Holdings Limited (GEH) that it did not own at an offer price of S$25.60 per share.

As of 6pm on 26 June 2024, OCBC and its concert parties has garnered 90.24% of the shares in GE

This led to many questions by investors about what are the different scenarios that may pan out from here, and how they will potentially impact shareholders of GE.

Let us find out more about OCBC’s offer for GE, and what it means for shareholders for GE. 

ocbc great eastern geh offer summary

What you need to know about OCBC’s offer for Great Eastern

  • OCBC launched a general offer to acquire the remaining 11.56% stake in Great Eastern Holdings (GE) that it does not own. 
  • The offer price is S$25.60 per share payable in cash. This is 36.9% above GE’s share price before the announcement.
  • The total outlay for OCBC is S$1.4 billion, which OCBC will fund from internal resources.
  • GE has an embedded value of S$36.59 per share as of December 2023. At the offer price of S$25.60, GE is valued at Price to Embedded Value (P/EV) of 0.7x. 

#1 – Offer price of $25.60 is 36.9% above GE’s share price before the offer announcement

The Offer Price represents a premium over the market price and the volume weighted average price (“VWAP”) of the Shares over the 1-month, 3-month, 6-month, 12-month and 5-year periods up to and including the last trading date of 9 May 2024.

This is also 54% above GE’s net book value of S$16.66 per share as at end-Dec 23.

Great Eastern’s net book value
Source: OCBC

#2 – Rationale of offer

OCBC believes that with a full control of GE, it will be able to solidify its wealth management position, through cross-selling services across insurance, wealth and banking solutions to GE’s customers in GE’s key markets of Singapore, Malaysia, Indonesia and Brunei.

GE reported net profit of S$775m in FY23. The increased 11.56% stake would add S$90m to OCBC’s net profit.  At an investment cost of S$1.4b, this translates to return on investment of about 6.4%.

According to OCBC management, the deal will raise ROE to 14.0%, from 13.7% in FY23. This is mainly due to a decline in net equity. 

CET1 ratio will fall from 15.9% to 15.3%, due to an increase in the risk weighted assets. After the payment of FY23 dividend, CET1 ratio would be 14.5%.

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Source: OCBC

An increase in ROE and fall in CET1 ratio suggest that there is no compelling reason for OCBC to raise its dividend payout ratio after this exercise is completed. 

OCBC management maintained that it will keep to a 50% dividend payout ratio post acquisition. Though GE has S$6.3b of cash and cash equivalent as at Dec 23, this forms part of working capital for an insurance outfit.

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Source: OCBC

#3 – IFA views the offer as not fair but reasonable

Ernst & Young Corporate Finance has been appointed as the independent financial adviser (IFA) for the transaction. 

The IFA is of the opinion that the financial terms of the offer are, on balance, not fair but reasonable, and has advised the Independent Directors to recommend that shareholders accept the offer. 

The Independent Directors of GEH concur with the IFA’s assessment of the offer, and recommend that shareholders accept the offer.

GE has an embedded value of S$36.59 per share as of December 2023. At the offer price of S$25.60, GE is valued at Price to Embedded Value (P/EV) of 0.7x. 

The IFA is of the view that the offer is not fair having considered the following:

  • The Offer Price of S$25.60 per share is lower than the derived range of values of GEH to be approximately S$28.87 to S$36.19 per share.
  • The P/EV ratio implied by the offer price of 0.70x represents a 30% discount to the reported embedded value (EV) of GEH as at 31 December 2023 and does not ascribe a value to GEH’s value of One Year’s New Business.
  • The P/NAV ratio implied by the offer price of 1.5x is lower than the average and median P/NAV of comparable transactions of 1.8x and 1.9x, respectively.
image.png

The IFA is of the view that the offer is reasonable having considered the following, amongst other factors:

  • The P/EV ratio implied by the offer price is above the average and median daily P/EV ratios of 0.57x and 0.53x, respectively, for the five-year period up to the announcement date.
  • The P/EV ratio implied by the offer price is in line with the average and median P/EV of comparable companies.
image.png

What’s next from here? 

As of 6pm on 26 June 2024, OCBC and its concert parties has garnered 90.24% of the shares in GE. 

As the number of Great Eastern shares held by the public has now dipped below the 10% threshold GE will be suspended from trading after OCBC’s offer closes on 12 July 2024.

Below, we outline a few scenarios that may happen from here. 

Scenario #1 - Offeror fails to get 75% of shares they did not already own

If the offeror fails to get 75% of shares they did not already own, GE will likely be asked by the Singapore Exchange Regulation (SGX RegCo) to restore its free float. 

OCBC has announced that it has no intention to restore the free float. 

Hence, in the event that OCBC’s ownership of GE’s shares is below 97.17% on the 12 July deadline, shareholders who continue to hold their shares will not be able to transfer their shares without the prior approval of SGX.

Scenario #2 - Offeror gets at least 75% but less than 90% of shares they did not already own 

If the offeror gets at least 75% of shares they did not already own, SGX RegCo may eventually direct GEH to make an offer to delist.

According to the SGX RegCo, exit offers in conjunction with voluntary delistings must not only be reasonable, but also be fair. 

However, there is no guarantee when or if this will happen.

Trading will remain suspended until the free float is restored, or an exit offer is made. Shareholders who continue to hold their shares will not be able to transfer their shares without the prior approval of SGX.

Scenario #3 - Offeror gets 90% of shares they did not already own

If the offeror gets 90% of shares they did not already own, it may exercise the right to compulsorily acquire the remaining shares at the offer price. 

The table below shows a summary of the three scenarios.

Scenarios

 

OCBC acquires less than 75% of shares it did not own

 

OCBC acquires 75% and more, but less than 90% of shares it did not own

 

OCBC acquires at least 90% of shares it did not own

 

Total percentage of GEH shares owned by OCBC at the offer closing date 

 

  • Less than 97.17%
  • At least 97.17% but less than 98.87%
  • At least 98.87%

What may happen

 

  • GE likely to be asked to restore its free float
  • GE may remain suspended
  • GE likely to be asked to restore its free float
  • SGX RegCo may direct GE to make an exit offer
  • Exit offer must be fair and reasonable
  • Triggers mandatory compulsory acquisition of shares it does not already own
  • GE is privatised
Source: SGX, Beansprout research  

 

According to the Business Times, there are two key shareholders who together hold around 3% of the shares of GE.

One of the shareholders is Mr Lee Thor Seng, who is part of the clan that co-founded OCBC. He is reported to hold the stake via various companies.

Another shareholder is Wong Hong Sun and his brother Hong Yen, whose grandfather was the Chairman of GE for close to 20 years. Earlier, Wong was quoted as telling the Business Times that he will not sell his stake.

Action to be taken by GE shareholders

Shareholders should read the Offer Document carefully before deciding whether or not to accept the offer. 

Shareholders who wish to accept the offer but have not done so should complete, sign and submit their Relevant Acceptance Form(s) and all other relevant documents as soon as possible so as to reach the Offeror not later than 5.30pm (Singapore time) on 12 July 2024.

The offer price is final and OCBC does not intend to increase the offer price. OCBC also does not intend to extend the offer beyond 12 July 2024. 

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Source: OCBC

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