Should SPH Shareholders take Umbrage at the Proposed Restructuring?

Imagine you are running a company that has multiple lines of businesses. Most of your businesses are doing well, except for your restaurant business that has seen declining profitability. Due to changing consumer preferences, your restaurant has seen falling revenues over the past decade, but was still profitable all along. Recently, due to Covid-19, your restaurant has recorded its first-ever loss in FY2020.

Now, because you believe that your restaurant would continue to make losses in the future, you want to get rid of your restaurant business. You look around for potential buyers/takers, and I offer to take over your failing restaurant business.

What would be a fair price for this business?

Suppose I told you – firstly, you will had over your business to me. Additionally, I want you to give me $80 million in cash and $30 million in shares of your company and your subsidiary. I also want you to give me two buildings – the building that your restaurant operates in, and also the corporate office of your restaurant, worth a combined $147 million. All in, you have to give me around $250 million to take over your failing restaurant business.

What would you say?

You’d probably wonder why I’d even propose such a deal. You might even think I’m crazy.

But that’s the deal on the table for SPH shareholders as part of the restructuring exercise. Talk about taking umbrage!

The Public Reaction

When I first watched the clip of the CEO’s heated response to the journalist, I honestly found it hilarious. How dare you! But I did not expect this to blow up into such a sensational issue. A lot has been said about the competency of having retired generals taking up roles in the private sector. My view is that it all boils down to corporate experience and culture.

Take the example of Mr Chew Shouzi, the Singaporean who recently took over as the CEO of TikTok. Similar to our public sector scholars, Mr Chew has stellar academic credentials, earning his undergraduate degree at UCL, followed by a Havard MBA. Subsequently, his career path included a stint at Goldman Sachs as an investment banker in the Technology, Media & Telecommunications sector, followed by making partner at a leading Tech-focused venture capital fund. During his tenure as the CFO of Xiaomi, he led their IPO process in Hong Kong. In his most recent role, he was the CFO of ByteDance (Tik Tok’s parent company) before assuming the role of TikTok CEO. All round relevant experience in the Tech and Media sector.

Now, if you could choose, what profile would you pick to be the CEO of SPH?

On the point of culture, in organisations where seniority takes absolute precedence, individuals in senor positions may be blindsided by issues on the ground, especially if their subordinates constantly seek to paint the best picture. Over time, one may be entrenched in such systems, and may find it difficult to adapt to roles which require innovation in competitive industries.

This is a systemic issue, and I came across an excellent article on Quora which discusses the issue.

https://www.quora.com/Do-you-think-an-overhaul-is-needed-in-the-Singapore-civil-service-in-how-we-select-our-leaders-government-scholarship

What’s Next for Shareholders?

Shareholders would have to vote on the proposed restructuring sometime in July/August 2021. Since it is and EGM, it probably requires the approval of 75% of shareholders for the restructuring to proceed. I spoke to an SPH shareholder, who somehow seems to think that the deal would definitely go through, as there are substantial shareholders who would definitely support the deal. However, this is not true, as under the Newspaper and Printing Press Act, nobody can become a substantial shareholder of SPH without the approval of the Minister. Hence, no shareholder controls more than 5% of SPH shares, and 99.9% of SPH shares are held by the public, as per its 2020 Annual Report.

I think some shareholders may have been confused with the management shares class that SPH issues. Basically, the management shares only have greater voting power (200 votes per share vs 1 vote per share for ordinary share) when it comes to issues such as appointing or dismissing directors or any member of the staff of the company. In all other situations, ordinary shares are entitled to the same voting rights (1 vote per share) as the management shares. Currently, there are 16.3 million management shares, compared to 609.3 million ordinary shares. Hence, the voting power during the EGM on the proposed restructuring lies in the hands of each and every SPH shareholder.

What are the potential scenarios?

1. As per the analogy described above, shareholders decide that the best choice would be to give away c.250 million in cash and kind, to get rid of the underperforming media business. The proposed restructuring gets approved.

2. Shareholders decide that giving away c.250 million to dispose the underperforming asset is ridiculous. Shareholders request that the management seek a better deal for them. Ideally, the CLG is seeded with cash from “private and public sources” first, which then buys over the media business from SPH on a willing buyer, willing seller basis. For a reference, Alibaba acquired the South China Morning Post for $266 million USD in December 2015, in an all cash deal. Alternatively, variations of the financial terms of the deal could be negotiated, for example, SPH pays less than $80 million, or SPH does not transfer SPH News Centre and Print Centre (worth a combined $147 million) but instead rents the building to the CLG, and continue to collect rental income. Finally, sometime down the road, the financial aspects of the become more acceptable to SPH shareholders, and they approve of the transaction.

3. The proposed restructuring is not approved by Shareholders, and SPH Media remains part of SPH for the foreseeable future. SPH Media is *expected* to make losses over the next few years. Do note that SPH Media has always been profitable pre-pandemic, and only recorded its first loss ever due to Covid-19. What I find interesting is that for companies that have always been making losses (Grab, WeWork etc), they always project some improvement to profitability in the future, no matter how far-fetched it may sound to some. Now, we’re seeing the exact opposite, where a business segment that has always been profitable, is expected to “incur losses and widen” over the next few years. My point being – what really happens in the future is really anyone’s guess.

Conclusion

Much of the debate has been around the issues of editorial integrity, advertiser interests, quality of journalism and the like, but the decision the SPH shareholders face is essentially a financial one. However, if we were to see SPH Media from the perspective of serving as a “public good”, as the provider of news and information to the public, then the issue becomes about who should bear the cost of providing public goods? Should it be the taxpayers, in the form of Government financing, or should it be the SPH shareholders (who are most likely taxpayers themselves too), who have already seen the value of the investments declined so drastically, and yet are expected fork out an additional $250 million? Tellingly, the SPH shareholder is the one with the power to decide, not the taxpayers.

There are definitely no easy answers, but I’m sure we would all be watching closely on how this plays out.

Disclaimer: This article is intended for informational and discussion purposes only, and do not constitute financial advice. When in doubt, please contact a licensed financial adviser.

Note: As of writing, I do not have a position in SPH. However, my positions may change from time to time without further any updates to this post. 

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