NOL yesterday produced the circular to its shareholders containing advice HSBC has given to the independent directors of the company. The circular is in response to the mandatory conditional cash offer by Temasek for the 70% of NOL it does not own, announced on August 3.
In its letter to the directors, HSBC lays down three courses of action for NOL's shareholders. Firstly it says, "we recommend that independent director should advise shareholders... who are confident of the long term future prospects of the group and who believe that they would be able to realize a greater value from their shares in the future to retain their shares and not accept the offer."
The bank then advises that those shareholders "who wish to realize part of their investment in NOL, consider disposing of their shares in the open market if they are able to obtain a price higher than the offer price."
Finally it advises that those shareholders "who wish to realize all or part of their investment in NOL now, to consider accepting the offer if they are unable to obtain a price higher than the offer price."
This advice offers something for everyone and does not really help the process of deciding whether to accept the offer or not. The advice could be summarized as 'hold if you think the stock is going higher, sell if you don't' which is pretty much stock investing 101.
The bank however, has been extremely thorough in its financial assessment of the offer and has acquitted itself well. It has looked at NOL's share price to see how the offer price compares to NOL's historical share price. It has analyzed previous tender offers comparing the premium/discount of the offer price over the historical share price of NOL to selected tender offer transactions in Singapore. It has looked at liquidity and broker research coverage analysis to assess whether the historical share price of NOL provides a meaningful reference point for comparison against the offer price.
Then it compares the share prices of NOL and other companies in its sector before finishing off with a precedent transaction analysis to assess the valuation multiples implied by the offer price in comparison with multiples of similar transactions.
After such exhaustive analysis, it is interesting that HSBC can make no firm decision as to whether investors should accept or reject Temasek's offer. This is perhaps testament to the clever hand that Temasek has played. It has clearly thought long and hard about the actual offer price of S$2.80. This looks like being just enough to entice a few investors out of the stock, but not enough that it gets swamped.
The structure of the offer reinforces the view that Temasek only really wants to get about 50% of the company. By going over 30%, it became mandatory that Temasek make it bid for the remaining 70%. But Temasek's attached condition that it will only go ahead with the tender if it gets more than 50% means that it only wants the stock if it can take control.
It is still unclear why Temasek wants 50% control of a company of which it already owns 30%. Admittedly it will get more control while keeping NOL in the public domain. But the additional power of the company must be for a strategic reason.
Whether it gets control or not will be seen now in the responses it now gets from NOL's shareholders in respect of its $2.80 offer. NOL's shares finished trading yesterday at S$2.82. The question is, will Temasek make a second, higher bid?
