Martin Lee @ Sg
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MIIF Mother of all Divestment Plans for TBC

This morning, I was surprised when I saw the announcement by Macquarie International Infrastructure Fund Limited (MIIF) on their divestment plan for their Taiwan Broadband Communications (TBC) stake.

For those who have not been following the story, MIIF has the intention to sell off all their assets. This comes after a review of their business and an attempt to unlock value for their shareholders.

Fair enough.

However, many shareholders are already unhappy about the manager’s attempt to squeeze more money from shareholders by changing the management fee.

That is a story for another day.

But this divestment plan is either very brilliant or plain stupidity (depending on which angle you look from).

The idea is to inject TBC into Asian Pay Television Trust (APTT), a business trust that will be listed on SGX.

There will be a Minimum Valuation for the divestment, which is set at 95% of the valuation of TBC ($469.5 mil).

It is noted that over the last 18 months, certain third parties have provided unsolicited trade sale offers indicating interest in acquiring TBC. Some of these parties undertook third party due diligence and following their due diligence provided indicative offers for TBC at pricing levels below the Minimum Valuation and with conditions.

So now you have a situation where sophisticated buyers (after doing due diligence) are not willing to pay anywhere near the Minimum Valuation, and a decision is made to get ride of TBC by doing an IPO.

Shareholders of MIIF will have the option of receiving shares in APPT or cash ($0.408/share).

Existing shareholders of MIIF who decide to hold on to APPT shares will have gone through a silly roundabout exercise, changing from one listed entity to another. In the process, incurring hefty listing fees and being charged a performance fee by the manager.

And I certainly wouldn’t want to buy shares in APPT at their IPO price, given that sophisticated buyers are already not willing to pay such a price for it.

Leave a Comment:

Mr X says 8 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.

    Martin Lee says 8 years ago

    Dear Mr X,

    Yes, you are absolutely right. Let the market have the final say!

    It might end up that the bookmakers have problems getting institutional investors at the desired price, so it might very well be a long winded exercise for nothing.

Mr X says 8 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.

    Martin Lee says 8 years ago

    Dear Mr X,

    The thing is, MIIF is almost like a business trust! So why should the valuation of TBC in a business trust be any different from what it is currently?

    Can you imagine if the same thing were to happen with one of the REITs? Manager (at the prompting of shareholders) decide to liquidate the entire REIT so as to unlock shareholder value. And they choose to do it by injecting its assets into a new REIT and give the shares of the new REIT to the shareholders (and in the process, earning a performance fee).

    Should MAS allow such a thing to happen?

      C.S.Tan says 8 years ago

      Hi Martin, you have a very good point here. The market has already value TBC together with other assets in MIIF and the price is around S$0.60 per share currently. It may be a joke but after the IPO of APTT and if the manager cannot find buyers for the remaining assets in MIIF, maybe they would repeat the same trick by injecting the port, the toll way and the wind mills into another trust and do another IPO, ha ha!!

        Martin Lee says 8 years ago

        Dear CS Tan,

        Maybe inject everything into APTT….

        Or Macquaire might buy one of them at an inflated price to make sure they hit the performance fee target.

Mr X says 8 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.

    Martin Lee says 8 years ago

    Dear Mr X,

    It is quite weird because most of MIIF is TBC anyway. If the market currently does not value MIIF at NAV, why should it do so for the new entity?

    And then shareholders of the new entity will be asking the same question to management to unlock shareholder value…

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