MIIF Mother of all Divestment Plans for TBC

Mr X says 11 years ago

Hi Martin

I do not think there is much benefit in speculating on market irrationalities, there are much sillier and more outrageous things out there anyway.

From the looks of it, Macquarie is doing a valuation arbitrage and I must say with the current market sentiments there is a good chance they might pull it off. As for MAS intervening I do not think it is appropriate or necessary. MIIF has disclosed whatever it wants to do in a clear and transparent fashion, if the existing shareholders think it is dumb, it is their prerogative to vote down the resolution accordingly.

If any investment banker, underwriter or arranger thinks it’s dumb, it is up to them to reject the deal as unprofitable. If the general market thinks it’s dumb, it is up to them to re-value the trust to its correct value as reflected in its unit price. MAS should not be in the business of regulating legitimate business decisions no matter dumb they may seem unless there is suspected fraud, misrepresentation or clear violation of corporate governance.

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Mr X says 11 years ago

Hi Martin,

Indeed market dynamics often work in strange ways that defy logic, you could see it as the primary source of risk and profit opportunity. This is analogous to the disconnect in pricing we often see between physical property and that of REITs. One is often significantly higher than the other depending on the order of the day.

I suspect TBC’s ownership being structured as a trust will alleviate some pressure on Macquarie to generate value add through capital appreciation as market expectations on business trusts seem to be similar to that for annuities.

The key risk that I have not seen being discussed extensively is the substantial weakening in bargaining position of what is left of MIIF post-divestment. It will essentially be left with only a hotchpotch of poor quality assets that nobody wants, the cut in dividends will likely amplify its price plunge at a rate more than theoretical.

The need to divest these unattractive goods then becomes urgent. Paradox as it may sound, it might be in MIIF shareholders’ best interest to sell them off as quickly as possible even if it means doing it at a substantial discount; this becomes problematic though as the fees are structured to incentivize selling above valuation. Drag on another year of sub-par performance and we can expect another shareholder revolt which plunges MIIF into a vicious cycle of ever weakening negotiation position.

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Mr X says 11 years ago

On a business level this is definitely dumb, but one has to admit that there might be a good chance to unlock greater value for existing shareholders if they are smart enough to grab the cash and forget about the units.

Prospective trade sale prospectors tend to value TBC as a business on a going concern basis and most of us probably already known long time ago that the price will not be at MIIF’s valuation. I am of the view that the Taiwanese market and the size of TBC are not attractive to adjacent industry players to do an M&A.

However the moment it is divested into a business trust and IPO-ed, valuation ceases to be on TBC itself and instead it becomes the pricing of a financial instrument. This has the benefit of attracting a myriad of buyers that would previously not have made an attractive offer for TBC such as private & institutional traders, mutual funds, ETFs, investment bankers, man on the street punters etc.

The ethics of such an approach is questionable, but my gut sense is that in this yield hungry financial environment, MIIF and its (smarter) shareholders stand a decent chance of actually offloading a mediocre asset at an inflated price.

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