Ben Paul  1/07/2019, 9:08pm

SINGAPORE (July 1): The offer for Indofood Agri Resources lapsed this past week. In my view, the directors who recommended the deal should now resign.

Before I go any further, let me just make it clear that I am not accusing these directors of breaking any rules or being derelict in their duties. I am also not holding myself out to be some kind of expert on corporate governance matters. It seems clear from events that have unfolded, however, that the directors who recommended the offer do not recognise the underlying value that minority investors like me see in IndoAgri&rsquo s shares. Indeed, the recommending directors evidently do not recognise the value that IndoAgri&rsquo s controlling shareholder sees either.

With the offer out of the way, the key priority for IndoAgri&rsquo s board must now surely be to unlock the value that its controlling shareholder  Indofood Sukses Makmur  as well as a significant portion of its minority shareholders feel exists within the company. This is a task best spearheaded by a board unencumbered by members who have only recently recommended that minority investors sell their shares to the majority shareholder for 28 cents (or 27.75 cents on an ex-dividend basis) each.

To be sure, the recommending directors of IndoAgri were acting on the advice of an independent financial adviser. Yet, the basis of that advice, set out in the letter from the IFA to the recommending directors &mdash which was included in the circular to shareholders dated May 10 &mdash left many minority investors unconvinced that the offer represented good value. Certainly, I wasn&rsquo t convinced. In particular, the offer price of 28 cents per share was equivalent to a paltry 0.35 times ­ IndoAgri&rsquo s book value of 79.8 cents per share as at March 31.

According to the IFA, of the 23 other privatisation and delisting transactions over the past couple of years, only one was done at a lower price-to-book valuation. That company was Weiye Holdings, which was delisted last year with an exit offer price of 65 cents per share, or 0.3 times its book value. But Weiye actually maintained its listing in Hong Kong, and investors who refused the exit offer in Singapore had their shares automatically transferred. The offer for IndoAgri included no such option for minority investors to remain invested in their company.

It wasn&rsquo t long before it became clear that most minority investors preferred to remain invested in IndoAgri, despite the recommending directors&rsquo support for the offer at 28 cents per share. On April 10, the day the offer was announced, the controlling shareholder and its concert parties held 74.53% of IndoAgri. On May 23, one day before the offer was to have closed, the level of acceptances had lifted the offeror&rsquo s potential stake in IndoAgri to only 81.86%. The closing date for the offer was extended from May 24 to June 25.

On May 31, the controlling shareholder of IndoAgri demonstrated that it believed the company&rsquo s shares to be worth much more than 28 cents, by hiking its offer price to 32.75 cents per share (on an ex-dividend basis). But that still didn&rsquo t win over enough minorities. On June 25, at the close of the offer, the level of acceptances had lifted the offeror&rsquo s potential stake in IndoAgri to 88.08%, just short of the 90% threshold at which the company would have lost the necessary shareholding spread to remain listed. If the 90% threshold had been breached, the remaining minority shareholders of IndoAgri would have been forced to accept the offer too, or possibly be left holding shares in an unlisted company. Minority investors who accepted the offer will now have their shares returned to them.

As a minority investor, I would have liked to see the recommending directors of IndoAgri attempt to get a better deal for me, notwithstanding the advice provided by the IFA. For instance, they could have pushed the offeror for a higher price. Alternatively, the recommending directors could have insisted that some form of restructuring or dismantling of IndoAgri be explored to unlock the value of the company&rsquo s assets.

Of course, pushing hard on these fronts would not have endeared the recommending directors to the controlling shareholder of IndoAgri. On the other hand, misjudging the willingness of minority investors to dig their heels into the sand and resist an opportunistic offer &mdash even after the price was raised significantly &mdash hasn&rsquo t covered the recommending directors with glory. Directors who find themselves in a similar situation should just do whatever it takes to maximise the value of the company&rsquo s shares. And, they shouldn&rsquo t expect to remain in their jobs when the dust settles.

Now, given the outcome of the offer for IndoAgri, it seems to me that the time has come for the recommending directors to make way for a reconstitution of the whole board to facilitate a serious effort to unlock value for all of the company&rsquo s shareholders.

This story appears in The Edge Singapore (Issue 888, week of July 1) which is on sale now. Subscribe  here