Early July, the board of United Engineers (UE) came to a decision to sell all its treasury shares to undisclosed third parties, fetching a sum of $56 million. The transaction, facilitated by UOB Kay Hian, represented a meaningful stake of 3.14 percent of the company. 

The move, however, drew scrutiny from its second largest shareholder Oxley Holdings (Oxley) and raises questions by minority shareholders alike. Oxley, which has built one of Singapore’s most successful brands in property development, was not sounded out as a potential buyer and was not offered the option to take up the block sale.

Expressing dismay, Oxley Chief Executive Mr. Ching Chiat Kwong said that he would have seriously considered “giving a reasonable price that helps the company (UE) achieve better ground”. 

For purpose of context, in 2017, a consortium (YPI) led by Yanlord Land Group and Perennial Real Estate Holdings tried to take over of UE, but only managed to snap up 33.5-percent stake. Since then, YPI had control of board but differences with Oxley arose when the latter also became a substantial shareholder of UE in 2017 as well. 

Drawn to UE’s assets, Oxley has continued to build up its stake in the company. As of June 2019, Oxley has accumulated 18.9 percent in UE. Along with its executives Mr. Ching and deputy CEO Mr. Eric Low, Oxley’s direct and indirect interest combined to about 23.5 percent of UE. Despite that, Oxley has been unsuccessful in getting any of its executives on the UE board even after two appeals by Mr. Ching. Why? This raises serious doubts about whether UE is an entity that bothers about the rights of its minority shareholders, and we are talking about a minority that holds a very substantial amount of shares in the company.

Also leaving retail and minority investors feeling high and dry was UE’s decision to go on a separate placement of its entire block of treasury shares at a price of $2.58 per share. In 2017, minority shareholders had voted against the YPI’s offer price of $2.60 per share, leading to the takeover offer to lapse. Following which, YPI cannot increase its stake in UE by more than one percent every six months, unless it embarks on another general offer. 

The latest episode thus left investors wondering if the move was YPI’s strategy to accumulate an increased stake in UE via a third party who could end up being acting in concert hence the secrecy. Regardless, it also dented confidence in the current UE board. Looking at the public forum of Sharejunction, most forumers seem to show some distaste for the sale.

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Responding to concerns raised by Oxley on whether UE’s board had fetched the best price possible, UE managing director Mr. Roy Tan explained that it was “only normal for companies to place out shares at the market price”. Adding further that the UE board “chose not to approach Oxley directly in order to avoid an interested-person transaction (IPT) that would require shareholders’ approval.” UE shares were trading around $2.57 then. 

According to chapter 9 of Singapore Exchange (SGX) rulebook, the objective of ITP rules is to “guard against the risk that interested persons could influence the issuer, its subsidiaries or associated companies, to enter into transactions with interested persons that may adversely affect the interests of the issuer or its shareholders.” 

The chapter further states that the issuer must make announcements if the transaction to an ITP is equal to or more than 3-percent of the latest audited Net Tangible Asset (NTA) value. However, shareholder approval is only needed if the ITP transaction value is more than 5 percent of the latest audited NTA. 

Based on its FY18 annual report, UE’s NTA was $3.13 per share. With a weighted average 637,520,000 ordinary shares, this would translate to a total NTA of about $2 billion. As a result, UE’s latest transaction represented about 2.8 percent of the company’s NTA and hence should not require any shareholder approval.  

While Mr. Tan explained that the company needs to raise funds for general working capital purposes and that it wants to hold more cash for any potential investment opportunities, investors are also pondering why UE did not choose to turn to borrowings instead. 

For one, UE is one of the lowest geared property counters in SGX, with a net debt-to-equity ratio of about 44 percent and $277.9 million in cash as of 1Q19. At this level, the company still has significant debt headroom, comfortably sitting above its official net debt to equity ratio threshold of 1.1 times.

Prior to the latest fallout, Oxley deputy CEO Mr. Low had also raised this point that UE should consider “gearing up rather than doing a share placement so that it is not dilutive to shareholders.” He also suggested that UE should do a rights issue instead of a placement, if it so wishes to stay conservative, further promising that Oxley would underwrite the whole issue if UE fears that the rights would be undersubscribed. 

Despite Oxley’s efforts to court UE for a closer working relationship, the latter seems less “warm” to the idea. This raises even more questions as to why this is so. 

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