Today, I decided to accept the cash offer for CWG International Ltd. at $0.195/share. I bought CWG at an average price of $0.152/share between Sep & Oct 2017. The annualised rate of return is 133% and the nett gain is worth quite a tidy sum. But that is not the point.
Just like how businesses occasionally take big risks, investors occasionally take big risks too. Crypto-currency is an example for many people. CWG was an example for me where I placed a small bet – money I was willing to lose.
I had believed that the intrinsic value of CWG was much higher than the offer of $0.195/share and when I first saw the offer, I felt that it was a low-blow to investors. I did not believe that minority shareholders were fairly compensated.
Initial Investment Thesis
Although I had only placed a small bet, it was a carefully calculated bet. CWG, a property developer focused on the China market, had several things going for it when I invested in CWG. My investment thesis were that:
- Asia/China growth story remains intact. The stock dipped in May-June 2017 in reaction to the news that China was tightening its housing policies to cool an over-heated market. Not too good in the short-term, but this is great for the property market in the long-term.
- CWG had turned around its business. CWG had rapidly growing pre-sales figures. In 2017, it was on track to record 10bil RMB in pre-sales. These would be gradually recognized in the following years. In comparison, it only achieved 4.6bil RMB in 2016.
- Although debt levels were scary, cash-flow had improved significantly. So much so that CWG started paying dividends. Dividend rate of 1c/share translated to >6% (based on my initial investment). I believed that CWG could start paying down its debt.
- P/E was at an attractive 6. A nice number for value investors. This is much lower (cheaper) than many similar property developers.
To be honest, I did not go deeper into CWG, because it was just a small bet.
Then, came the news that the 3 largest shareholders of the company with an aggregate of 81% stake in CWG would acquire the entire company at $0.195/share.
They formed a special purpose vehicle (SPV) for this, and the 3 shareholders gave irrevocable undertaking to tender all their shares to the SPV.
Because the shareholders owned the SPV in the relative percentage of their shareholding in CWG, the commitment to give irrevocable undertaking to tender all their shares in CWG to the SPV made absolutely no difference to the 3 shareholders. It is basically passing the ownership of the company from one hand to the other.
But this action has significant implications to minority shareholders. It made the offer unconditional.
Essentially, minority shareholders had to accept the offer of $0.195/share and whatever reasons the 3 shareholders provided. If minority shareholders did not accept the offer, they would be stuck with illiquid stock.
Essentially, by colluding, the 3 largest shareholders could potentially avoid paying a fair price and Arm’s length price for stakes it did not already own. Even if they offered $0.01/share, the offer would become unconditional.
Where were the safeguards?
Monetary Authority of Singapore
MAS set strict guidelines on Merger and Acquisitions (Rule 10 of the SIC code). Apparently, the rule against special deals will not be breached where two or more persons come together to form a consortium. So it seems that they were playing by the rules.
Board of Directors
The Board of Directors is appointed to act on behalf and in the interest of shareholders. To be fair, they did their job: –
“The Board will, in connection with the Offer, appoint an independent financial adviser (the “IFA”) to advise the directors of the Company (the “Directors”) who are considered independent for the purposes of the Offer (the “Independent Directors”). A circular containing, inter alia, the advice of the IFA and the recommendations of the Independent Directors on the Offer (the “Offeree Circular”) will be sent to the Shareholders within 14 days from the date of despatch of the Offer Document.”
And on 1 Feb 18, they released their assessment that said that the offer was “Not Fair but Reasonable”. Reasonable because (IMO the most important reasons were that) there were no competing offer and the offer would becoming unconditional.
A politically correct answer. This validated my original hunch that the offer was a low-blow to minority investors.
As the saying goes, nobody cares more about your money than you do.
Perhaps investors should incorporate a risk factor for such structures. This means that for value investors, analysing the shareholding of the target company would be an important part of the assessment process. If a large percentage of the company is owned by a few shareholders, a larger margin of safety would be required. While I did not lose any money and was fortunate to make money, I would definitely be more careful in the future.
The shareholding of the company is a very important consideration. A small number of shareholders holding a large percentage of the company poses a risk to minority shareholders. It is the fiduciary duty of the Board of Directors to protect minority shareholders, but that is not always the case, as in the CWG example.