Decision Tree on the General Offer for M1

By The Boy Who Procrastinates - February 13, 2019


Amidst the Lunar New Year festivities, the past few weeks could potentially be momentous for many M1 shareholders. This emanates from the ongoing voluntary general offer for M1 which will be closing on 18 Feb 2019. 

Having vested in M1 myself, I too am in a quandary over whether to accept the offer or not. You see, I have purchased it when i first started out learning the art of investing as a beginner. It was in 2015 when it was priced steeply above $3 per share. But I will probably save the tale of woe for another time. 

In this current predicament, we can grouse about the perceived unfair offer price or we can play the hand that we have been dealt. In this article, I will focus on the latter and lay out the decision tree on the course of actions that is available for the minority shareholders. 



Update as of 19 Mar 2019

Following the closure of the Offer, Konnectivity has annouced that the total number of shares owned or agreed to be acquired by Konnectivity represent 94.55% of M1. With that, Konnectivity intends to compulsorily acquire the shares of the shareholders who have not accepted the Offer. The trading of M1 shares has been suspended. 


Update as of 27 Feb 2019

Further acceptances have been accepted, resulting in the Konnectivity controlling 90.15% in M1. As there is now less than 10% of the total number of issued shares of M1 held by the public, the free float requirement will not be fulfilled. Therefore, M1 will be delisted from SGX after the offer closes.

The closing date of the offer has thus been extended from 4 Mar to 18 Mar. 


Update as of 26 Feb 2019

For shareholders who have accepted the offer before it becomes unconditional, they should have received the sales proceed on 26 Feb. It will be credited directly to the designated bank account. 


Update as of 15 Feb 2019

It is announced that Axiata has accepted the voluntary general offer made by Konnectivity for its entire stake in M1.

M1 has also released a statement to declare that the Offer has become unconditional with the total number of shares owned or agreed to be acquired by Konnectivity representing 76.35% of M1. 

The closing date of the offer has thus been extended from 18 Feb to 4 Mar. 

For shareholders who have accepted the Offer before the announcement, they will receive the payment within 7 business days (by 26 Feb). For those who have yet to accept but would like to do so, will receive the payment within 7 business days after the Konnectivity has received their acceptance. 

Currently, Konnectivty has yet to achieve the revised compulsory acquisition threshold of 93.33% but has reached the majority approval threshold of 75% in the event of a delisting resolution. 

Based on the information available, I feel that the recent move by Axiata might spur higher acceptance rate among minority shareholders who have yet to reach a decision, which might amplify the possibility of a delisting scenario. 




Offer

On 27 Sept 2018, Keppel Corporation Limited and Singapore Press Holdings Limited has made a voluntary general offer to acquire the remaining stakes in M1. It is carried out via Konnectivity Pte Ltd ("Konnectivity"), a joint venture company majority held by Keppel. 

The Offer Price for each M1 share is at $2.06. In order for the Offer to turn unconditional, Konnectivity should be holding more than 50% of M1 Shares (minimally 50% + 1 share) by the end of the Offer period.

Pursuant to Rule 28.1 of the Singapore Code on Take-overs and Mergers, Konnectivity is required to announce and inform SGX on the following day after the offer becomes unconditional. 

Given that there has not been announcement of such nature by Konnectivity (other than the mandatory declaration of valid acceptance on 22 Jan when it has extended the closing offer date), I would think it is safe to assume that the 50% threshold has yet to be satisfied. 



Intention of Konnectivity

According to the Offer Document, the stated intention of Konnectivity is to gain majority control of M1. Konnectivity will, following the close of Offer, conduct a review of M1's operation with the aim of implementing strategic and operational changes to allow M1 to compete more effectively in the telecommunication sector. 

As such, the majority control obtained by Konnectivity will allow it to facilitate the business transformation of M1.



Current M1 Shareholders

According to the 2017 Annual Report, the top 3 substantial shareholders of M1 (as of 22 Feb 2018) are as follows: 


Prior to the start of the general offer, Konnectivity has an aggregate interest of 33.32% in M1. As of 22 January 2019, Konnectivity has announced that it has received acceptance of 1.05% of the total shares. This brought the total amount of shares owned by Konnectivity to 34.35%

Therefore, Konnectivity needs only to acquire an additional 15.65% of the total number of shares in order to reach the 50% threshold. Apparently, Axiata is holding the trump card in this offer. 

Contrary to general expectation at the outset of the Offer, I would think it is unlikely that Axiata will mount a counteroffer at the eleventh hour, with just less than a week left to make a decision.   


Compulsory Acquisition 

In the event that Konnectivity has received valid acceptance or has acquired shares that totalled to 93.33% or more of the total number of M1 issued shares (90% of the shares that Konnectivity does not own at the date of offer), Konnectivity has stated that it intends to exercise its right (under Section 215, Companies Act) to compulsorily procure the remaining unacquired shares on the same offer term. This will ultimately result in the delisting of M1 from SGX. 

If Konnectivity has failed to acquire the sufficient number of M1 shares to compulsorily acquire the remaining M1 shares, Konnectivity may request M1 to apply to SGX to be delisted provided that: 
  • delisting resolution is approved by a majority of at least 75% of the total number of issued shares and 
  • delisting resolution is not voted against by 10% or more of the total number of issued shares
In a similar fashion, Axiata has a pivotal role if the scenario of a delisting resolution plays out.



Free Float Requirement

Pursuant to Rule 723 of the Listing Manual, there should be at least 10% of the total number of issued shares of a listed company held by the public at all time. If the percentage of the total number of M1 shares held in public hands fall below 10%, SGX may suspend the trading of M1 shares at the close of the Offer. 

Under the Listing Manual, "public" in this case refers to, among other things, persons other than substantial shareholders (ownership of 5% or more of the voting shares of M1), hence effectively excluding Axiata by the definition. 

In the event that the free float requirement has not been met, Konnectivity has stated that it does not intend to preserve the listing status of M1. However, under such situation, Konnectivity may not be able to compulsorily procure the remaining unacquired shares if the compulsory acquisition threshold of 93.33% is not achieved. 

To put it simply, if Axiata does not tender all its shares (28.69% interest) in acceptance of the Offer and there is less than 10% of M1 shares held by shareholders who are members of the public, the trading of M1 shares will remain suspended. 

To ensure that shareholders do not have to hold suspended shares for an indefinite period, Konnectivity has obtained a conditional confirmation for waiver of aforementioned conditions to the delisting resolution from SGX in the event that M1 does not meet the free float requirement. In such circumstances, Konnectivity will offer cash exit alternative on the same terms as the Offer to the remaining shareholder, which may eventually lead to the delisting of M1. 




Decision Tree on the General Offer for M1

With all the information presented above, we can now delve into the decision tree on the general offer. 
(click to enlarge)

It might appear a little intricate at first glance, but fret not. The subsequent sections will break down the branches of the decision tree. 

M1 shareholders can choose to either accept the offer by completing the Relevant Acceptance Form or not accept the offer. 

Alternatively, shareholders can also choose to sell their shares on the open market and lock in at the prevailing price. At the time of writing, M1 is currently priced at $2.04 per share. 

I would think that this is probably due to pessimism surrounding the conditionality of the Offer and some may choose to seal the deal, albeit at a price lower than the Offer price. 

Nevertheless, selling it on open market can justifiably be considered a more straightforward option at this stage. The difference is insignificant at $0.02 per share (excluding transaction fee) and it offers a higher degree of certainty than participating in the Offer.



Accept the Offer

If the shareholder has decided to accept the offer, there are 3 possible scenarios that could play out, depending on the amount of shareholding interest owned by Konnectivity by the close of Offer: 

  • Konnectivity owns less than or equal to 50% of M1 issued shares
Should the Offer fail to become unconditional, it is likely to be business as usual for M1 and its shareholders. Konnectivity will not be able to gain majority control of M1. The relevant number of Offer shares will be returned to the shareholder's CDP account no later than 14 days from the lapse of the Offer. 

Previously, Axiata, Keppel and SPH have ended their strategic review on the divestment of their stakes in the telco without reaching a consensus in July 2017. Following the news, M1 stock has fallen approximately 9%

In my opinion, the share price of M1 is likely to fall back to the price level prior to the general offer, if not more. 


  • Konnectivity owns more than 50% but less than 93.33% of M1 issued shares
If Konnectivity owns more than 50% of M1 shares by the close of Offer, the Offer will become unconditional. As such, the shareholder will receive the payment within 7 business days. 

Having achieved majority control of M1, Keppel and SPH will likely to proceed with their stated intention of facilitating the business transformation of M1. It is anyone's guess as to how successful M1 will turn out to be under the management of Keppel and SPH. 

However, I would anticipate the share price of M1 to fall below $2 in the short term. This could be attributed to the mediocre 2018 financial results, as well as the increasingly competitive landscape of the telco industry. 

Alternatively, Konnectivity may request M1 to apply to SGX to be delisted. But this would depend on how likely it is to attain approval of at least 75% of the issued shares. For example, if Axiata does not accept the Offer, the delisting of M1 will be highly improbable. 


  • Konnectivity owns more than or equal to 93.33% of M1 issued shares 
In such scenario, Konnectivity has intended to exercise its right to compulsorily procure the unacquired shares and proceed to delist M1 from the local bourse. 

Similarly, the shareholder will receive the payment within 7 business days after the Offer becomes unconditional. 



Does not Accept the Offer


If the shareholder has decided not to accept the offer, there are also 3 possible scenarios that could play out, depending on the amount of shareholding interest owned by Konnectivity by the close of Offer: 

  • Konnectivity owns less than or equal to 50% of M1 issued shares
Similarly, it is probable to be business as usual for M1 and its shareholders. With less than or equal to 50% of shares, Konnectivity will be unable to gain majority control of M1. 

In my opinion, the share price of M1 is likely to fall back to price level prior to the general offer, if not more. 


  • Konnectivity owns more than 50% but less than 93.33% of M1 issued shares 
If Konnectivity has achieved majority control of M1, Keppel and SPH will likely to proceed with their stated intention of facilitating the business transformation of M1.

However, I would anticipate the share price of M1 to fall below $2 in the short term. This could be attributed to the mediocre 2018 financial results, as well as the increasingly competitive landscape of the telco industry. 

Alternatively, Konnectivity may request M1 to apply to SGX to be delisted which may hinge upon the result of the general offer. 


  • Konnectivity owns more than or equal to 93.33% of M1 issued shares 
In such scenario, Konnectivity has intended to exercise its right to compulsorily procure the unacquired shares and proceed to delist M1 from the local bourse. 

Even if the shareholder has not accepted the offer at the onset, he has to relinquish his shareholding on the same offer term.



Closing Thought

For the past few months, M1 has been trading narrowly between the range of $2.04 to $2.12. And it is evident that the share price is being propped up by the offer price. If this price support is to be removed, M1 share price is likely to sink further. 

Personally, I think it is unlikely that Konnectivity will be able to obtain 93.33% or more ownership of M1 shares. There could probably be an equally likely chance of Konnectivity owning less than or more than 50% by the close of Offer. I would presume that most might take a side towards the end of Offer period while waiting to see if Axiata is making any move. 

With the increasingly competitive landscape of the telecommunication industry, worsened by the establishment of low-cost mobile virtual network operators, it is challenging to operate in the current saturated market. 

It would appear that the industry model is no longer the secured oligopoly as it once was. The pricing pressure aggravated by the incoming TPG Telecom, as well as the rising adoption of the cheaper SIM-only plans have posed a double whammy to the underlying revenue of existing telco. 

To be frank, I am not sanguine on the outlook of telco industry at this stage. Furthermore, I imagine that M1 share is likely to trend downward regardless of the outcome of the general offer. Having said that, I would consider either selling it on open market or completing the Relevant Acceptance Form. 


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Disclaimer: Kindly note that this is not a sponsored post. The author is in no way affiliated with the stated entities (other than being an investor of M1) and does not receive any form of remuneration for this post. The Boy who Procrastinates has compiled the information for his own reference, with the hope that it will benefit others as well.

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11 comments

  1. I thought through the process and I think it is best to just sell it in the market because I don't think the deal will go through at the current acceptance level (35% in total).

    Axiata will not counter offer given the tough environment, but it doesn't make sense to sell either given it is a Telco who wants to grow its footprint.

    The likely scenario, konnectivity deal lapses after extending another month. Price falls back to slightly above pre offer price because it is buffered by the dividends and a slight change in Telco sentiments

    ReplyDelete
    Replies
    1. Hello TFG!

      Thanks for sharing. That is a really well thought-out sequence of events.

      I agree that Axiata will likely not accept the offer, which makes it difficult for the offer to be unconditional. An additional 15.65% ownership is quite a significant margin to bridge.

      But at the same time, I don’t think Keppel and SPH would waste all those resources putting together an offer, only to let it lapse.

      In any case, selling it on the open market is justifiably a feasible option at this stage. It is just $0.02 difference but comes with a greater degree of certainty than accepting the offer.

      Delete
  2. Thanks for this info. Your insights are really helpful in decision making. Keep sharing such info.

    ReplyDelete
  3. You have left out the scenario whereby the free float of M1 is less than 10%. Since Axiata holds more than 5% of M1 shares, it is not considered as part of the free float.

    Assuming that Axiata did not accept the offer but the public float is less than 10% as many minorities accept, you might be looking at a situation whereby M1 will be delisted since it could not meet SGX listing requirements for free float. Shareholders might be holding an unlisted M1 if they do not accept the delisting exit offer.

    ReplyDelete
    Replies
    1. Hello GH!

      Thanks for pointing it out! I have updated with the information on the free float requirement accordingly.

      My understanding is that it will lead to a similar conclusion. Konnectivity has sought and obtained a conditional confirmation from SGX to offer cash exit alternative on the same terms to the remaining shareholders in the event that M1 does not meet the free float requirement.

      Delete
  4. Hi TBWP

    Axiata just announced that they accepted the offer so I am guessing it's a privatization offer for everyone in this case.

    ReplyDelete
    Replies
    1. Sorry I was gonna end with a question mark instead of statement :)

      Delete
    2. Hi B,

      I have also just been apprised of the latest development in this matter.

      Given that Axiata has accepted the offer to sell its 28.69% stake in M1, the offer has definitely become unconditional.

      Taking this into consideration, the total known shareholding interest by Konnectivity should now be estimated to be 63.04%, which is still a margin from the compulsory acquisition threshold of 90%.

      Alternatively, even if the compulsory acquisition threshold is not met, Konnectivity may request for a delisting resolution. With its shareholding interest approaching the approval threshold of 75%, the resolution is likely to be passed.

      Psychologically, I feel that the recent move by Axiata might spur higher acceptance rate among the minority shareholders who have yet to reach a decision.

      But based on the information available at this stage, it might be premature to confirm that M1 will be delisted for sure. Nevertheless, I believe that the possibility of such occurrence has definitely increased tremendously.

      Delete
  5. The post has been updated with the latest development, following the recent acceptance by Axiata.

    ReplyDelete
  6. Your understanding of the compulsorily acquisition is incorrect. Konnectivity can only do so if they receive 90% of the issued shares (other than those they already held). It is not 90% of M1 shares capital.

    By my calculation, Konnectivity will need around 93.3% of M1 share capital to effect compulsorily acquisition. Of cos, they will hit the Free Float Requirement first and go with that.

    ReplyDelete
    Replies
    1. Hi Paul,

      Thanks for pointing it out! Yes, you're right. It should be 90% of the issued shares, excluding what the offeror has owned at the date of the offer. My bad, should've paid more attention to your advice on SSI.

      I have since revised the compulsory acquisition threshold to the correct percentage of 93.33%.

      Delete