MIIF propose to divest Taiwan Broadband Communications (TBC) into Asian Pay Television Trust (APTT)

In a move to realize value for MIIF’s shareholders, MIIF proposed to divest TBC into a business trust and payout in units and special dividends to shareholders.

MIIF propose to divest Taiwan Broadband Communications (TBC) into Asian Pay Television Trust (APTT) hua nan expressway 71

MIIF finally proposed concrete plans to divest its crown jewel TBC into a business trust.

The full report can be viewedhere. You should read this article I posted 2 years ago on MIIF before reading this.

Shareholders not happy with MIIF

To recall, a few majority share holders was thinking that MIIF was not taking the steps to realize value for their shareholders and so there was a very big hooha to force a change in the board. That failed and MIIF engaged CIMB to do a strategic review.

In light of this strategic review, MIIF proposed to

  • distribute existing excess cash to Shareholders as a special dividend;
  • commence a joint process with Macquarie Korea Opportunities Fund (“MKOF”), MIIF’s TBC co-shareholder, to realise maximum value for the investment in TBC and to pursue the orderly divestments of MIIF’s interests in Hua Nan Expressway, Changshu Xinghua Port and Miaoli Wind. Such divestment options could include a trade sale or initial public offering of the businesses;
  • distribute the proceeds from any divestments to Shareholders as soon as practicable; and
  • allow MIIF’s corporate-level debt facility to lapse upon maturity and not renew
    such debt facility

MIIF change the structure they are paid

  • On top of that, they decide to change the structure which they will get their fees the reduction of the base fee by 50 per cent, which would lower MIIF’s operating expenses;
  • the establishment of a success fee linked to the successful divestment of MIIF’s
    businesses, which would only be paid if the proceeds from the divestment of MIIF’s businesses reach a level which represents a 30.4 per cent premium to the value of MIIF’s businesses implied by its share price, prior to the announcement of the strategic review on 10 October 2012.

Details of divestment

Not much concrete information is released yet but here are the key points:

MIIF present situation

Outstanding no of shares: 1170 mil

Market Cap: SGD 664 mil

TBC Valuation: SGD 507 mil (Dec 2012)

MIIF Asset Value: SGD 756 mil (807mil Dec 2012) (961 mil 2011)

TBC Purchased at:

  1. Total cost of purchase is S$479 mil.
  2. Initial acquisition of S$161 mil in Jul 2007. (33.6%)
  3. Acquisition of S$174 mil in March 2011. (36%)
  4. Securities issue consideration of S$143 mil in June 2011. (30%)

Divestment as a business trust

Divesting TBC as a SGX listed business trust allows shareholders to enjoy being paid out of cash flow instead of being limited by accounting profits.

Business trust do not have that good of a track record in Singapore. As they are seen as poorly performed, their share price is also affected.

Recent listings such as Religare Trust and HPH Trust have been a bit under the water, but they have not gone through a market bear yet.

Does present a good place to look for massively undervalued investments though.

I see this more as moving from one slaughter house to another. You still get slaughtered.

Perhaps you will only be slaughtered if, as a business trust, you still get managed by the same group of people, or people of the same caliber.

Read the part below on what I deemed as important determinant of a trust or fund.

I always remember that the same kind of assets such as REITs or shipping trust, under different hands can be pretty different.

Pacific Shipping Trust versus FSL Trust lease ships, but different management have changed their fortunes in different ways.

One at least knows who they should lease the ships to. The other just have no clue.

Divestment at SGD 469 mil

The Independent Directors believe that total transaction costs relating to the divestment of MIIF’s businesses amounting to 5.0% of gross proceeds are reasonable. As such, achieving consideration from the Proposed Divestment equating to 95.0% of the Board’s Valuation would be a good result for Shareholders. Taking into account the above, the Minimum Valuation has been set at 95.0% of the Board’s Valuation which equates to S$469.5 million (after all transaction costs) or Shareholders receiving S$0.408 per share.

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 what they are saying is that the prospective acquirers are actually not willing to pay that high, and this is a good deal and we should take it.

Now does this say much about taking a stake in APTT or that they didn’t really buy something good in the first place?

The prospective sell price is lower than their purchase stake of 479 mil. Given inflation and development of capabilities since 2 and 6 years ago, the future prospect of TBC is actually less than last time.

We see that TBC have been growing in subscribers and EBITDA these few years, so the purchase price then must have factor in this growth rate.

Buyers are not willing to buy higher can only mean current valuers are valuing TBC less than last time what MIIF value it at.

So it may be the case MIIF overvalued this investment in the past.

It is disappointing that we didn’t get a 20% gain from this divestment.

While shareholders can finally realized the asset at NAV, I really hate the thought of MIMAL making money from this divestment just because they sold it at NAV.

 

Should I take my stake in APTT

Shareholders who wish to remain invested in TBC can do so through receiving their share of the MIIF APTT Units, which will be listed on the SGX-ST, without the need for any cash outlay. Alternatively, Shareholders who wish to exit their investment in TBC can do so through exercising the Cash Election and will receive cash equal to the value of their share of the MIIF APTT Units based on the initial public offering price.

The creation of APTT, which is a new listed entity, will provide Shareholders with an additional investment choice and greater flexibility as to how they wish to invest their proceeds from the Proposed Divestment.

Evaluating whether to purchase more of APTT or to take all cash and no units depend on a rational evaluation.

We should set aside some sunk cost thinking that we should definitely take a stake in this. We should evaluate it as any investment, evaluating it based on its future cash flow.

  1. TBC is leverage at near 60% if I remember, will the IPO remove part of the leverage
  2. The prospect of future growth
  3. The defensiveness of a digital TV broadcasting and broadband service in a Taiwan context
  4. A sensible intrinsic value
  5. Versus the price you pay
  6. Who is managing it

My opinions on MIIF

To say I am not a happy shareholder since their IPO days is an understatement. For a reputable Australian bank, they and some of these Australian companies have not shown a track record of being good managers.

In fact, the Australian trusts that have been listed here seem more to fleeced Singapore investors more than creating something of value.

MIIF have all along seem content to earn their base management fees and not actively look to add value to the fund.

They were so inactive for a long time before they decided to acquire another 25% stake in TBC because there was nothing good to buy.

And they decide to buy back their share because that will add value to shareholders.

It is only after the major shareholder hooha, that they decided they need to do a strategic review!

Which begs the question why the hell do we need them for as managers if they cannot evaluate prospects properly and have to engage a cheap Singapore company to do that (hope no offense to CIMB)!

Isn’t the job of the manager to consistently evaluate prospects? All these strategic reviews prove is that the internal management is incompetent.

And upon strategic review, they came up with recommendations that you and I and probably the major shareholders can recommend!

It’s a waste of shareholders money!

Changing the structure they are paid is a clear way to say they are looking at the last alternative to get value out of the fund at the expense of shareholders.

Because of their poor share performance, they can never earn the performance fee, so they tell shareholders they will get a fee if they manage to sell above NAV.

Isn’t that what a manager should be doing in the first place? If you tell me you manage to sell above the NAV and get paid better I can understand the rational of it.

My warning to all next time thinking of getting invested in listed entities like this is to look more into how they operate and evaluate sternly their operation records.

Capital Allocation as an important determinant

The key to funds and like this have to be their capital allocation and it is difficult to determine that.

After so much investing, I do place business determinants like capital allocation, sustainable recurring cash flow and valuations as the most important criteria.

It means that as investors, you either invest a small portion and watch their capital allocation or you wait to see their capital allocation initiatives to judge them.

Are they buy assets that add value to the trust?

Are they making hard decisions that shows it benefit the shareholders?

Are they risk managing well?

Do the actions consistently benefit shareholders or screw us up?

These will eventually lead to higher DPU and Share Price.

Trust, Funds are better hunted during corrections and bears

Although some of these funds and trusts have bad structures, the underlying assets may still be worth a lot of value.

This presents a good hunting ground for people able to value the underlying versus the share price.

Usually when they IPO, they can be overpriced. The sensible thing is to wait for a correction to see if it presents a  good deal.

You have more margin of safety, or perhaps it approaches its fair valuation more.

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  • lzw

    you are most definitely on point here. I am gonna cash out. with their cash cow slaughtered, I’m not expecting MIMAL to divest the rest of their assets anytime soon

  • C.S. Tan

    Very insightful comments, Drittz..

    I think at this time the point is whether to sell MIIF before the IPO of APTT or to receive the cash pay out first. Now the market has priced MIIF at around S$0.60 a share, this includes all the assets in MIIF (TBC, port, Tollway and Miaoli). To IPO TBC under APTT is like transferring the asset from the left hand to right hand and still under the management of the same people, I presume.

    Will the market treat APTT differently and raise its market value? Maybe or maybe not. Can the IPO pricing for APTT be very much above S$0.408? I doubt so.

    Now after the IPO, MIIF will be left with some not so exciting assets, so its share price may plunge after APTT’s IPO, which I think is almost certain. It is a risk to take if we want to wait for the APTT IPO.

  • http://www.productiveorganizer.com/ Kyith

    Hi CS Tan,

    It is disappointing that its a left hand to right hand transaction. I will defitintely take cash on this. Because I lost confidence in their management. Still, i view TBC to be a pretty good asset. The market does not think so, or perhaps MIIF is lying to us?

    I think the share price of MIIF will be in liquidation mode even after this. Maoli will not be amount to much but perhaps CXP will prop up the value. If it plunge to a certain level, there may be some justification to bargain hunt.

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  • DLC

    I was very happy to have read your blog on MIIF. I had attended the EGM and AGM in FY2011 and FY2012 and have the negative feelings on MIIF management. Sold my lots on May 6 at 0.63 cts per shrs just in time before the suspension. Price now reduce to 0.198 cts after suspension. Many thanks for a good review from u. Regards from DLC

  • http://www.productiveorganizer.com/ Kyith

    thanks! but we shouldn’t judge it by short term movements. btw i didnt attend tha EGM and AGM, how were they like?