Update on 28 June: OCBC announced that it has garnered more than 90% of the shares in Great Eastern as of 25 June. Since the number of the insurer’s shares held by the public has fallen below the 10% SGX Free Float Requirement, Great Eastern will be suspended from trading after OCBC’s offer closes on July 12.
Alvin’s view: GE shares can be suspended due to insufficient float, potentially leaving shareholders in limbo. GE shareholders have two options: accept the offer, even if it seems unfair, and move on, or hold on to fight it out later. If OCBC obtains 90% of the shares it did not previously own (or 98.87% of the total shares), it can compulsorily acquire every share at the offer price. It’s a standoff between OCBC and GE’s dissenting shareholders now, and it’s uncertain who will relent.
OCBC has announced an offer to buy the remaining 11.56% stake in Great Eastern that it does not own, at S$25.60 per share. The deal will be worth S$1.4 billion.
The more interesting question is, why now?
It’s not as if OCBC lacked funds. In fact, its recent quarter’s net profit was a record S$1.98 billion, more than the S$1.4 billion offer to buy the remaining Great Eastern shares. In 2023, OCBC generated more than S$9 billion in cash from its operations. So, the issue can’t be a lack of funds and OCBC had the ability to take Great Eastern private all these while.
OCBC has also been the largest shareholder of Great Eastern, owning almost 90% of the subsidiary. Great Eastern’s results have already been consolidated and reflected in OCBC’s financials. Thus, it matters little whether Great Eastern is a 90% or wholly owned subsidiary. There are also unlikely to be any restructuring, leadership, or strategy changes even if Great Eastern is privatized. Essentially, it’s business as usual.
In fact, I would argue that there isn’t any incentive for OCBC to take Great Eastern private. Why ‘spend’ money to buy out the minority shareholders when OCBC already has effective control in the current status?
But I believe things changed when complaints from minority shareholders grew louder this time.
In March 2024, an ex-remisier and shareholder of Great Eastern, Ong Chin Woo, representing a group of minority shareholders, sent a letter to the board requesting to table three resolutions at the AGM:
- Resolution 1: To withhold 30% of Board of Directors’ fees until GEH’s share price recovers to 0.8 times of its Embedded Value.
- Resolution 2: To replace OCBC shares in the current Executive Share Option Schemes (OCBC Share Option Scheme, OCBC Deferred Share Plan and OCBC Employee Share Purchase Plan) with GEH shares.
- Resolution 3: To appoint an independent financial advisor to explore options to enhance GEH shareholders’ value.
The board consulted a lawyer and replied that ‘his request does not satisfy all of the requirements necessary for a requisition for resolutions to be moved at the next annual general meeting.’
In other words, it was a no-go. Minority shareholders wouldn’t go to such lengths unless there was a strong impetus to do so, but regrettably, Ong’s concerns were dismissed.
I believe Resolution 2 is valid. I was appalled to learn that Great Eastern’s key managers receive OCBC stock options instead of Great Eastern options. This is the first time I’ve come across such an unconventional reward structure.
The purpose of rewarding management with stock options is to align their interests with the company’s prosperity. If management performs well, the stock price rises, and they benefit. But when management receives shares of another company, what behavior are you incentivizing? It sends the wrong message that your own company’s shares aren’t good enough.
Moreover, Great Eastern shares have only increased 124%, including dividends, since 2006. In comparison, OCBC shares have risen 376% over the same period, offering twice the returns. The performance divergence started with Covid in 2020. This puts them in a tough spot because, indeed, the managers are financially better off receiving OCBC stock options rather than their own company’s.
Ong met with the Securities Investors Association (Singapore) (SIAS), and the CEO of SIAS, David Gerald, sent a letter to the board of Great Eastern in support of Ong, raising further questions about Great Eastern’s performance. You can read the full letter here.
Even though the resolutions were not tabled, the questions were raised during the AGM, and a record is available here.
Regarding the key managers receiving OCBC shares, the Great Eastern board replied that ‘awarding OCBC shares helps to foster a “One OCBC Group” spirit.’ However, at the same time, they stated that they aren’t in a position to comment on the better-performing OCBC stocks compared to Great Eastern’s because they are not in banking. Even though they don’t know much about banking, they were confident enough to reward managers with OCBC stock options. Contradictory?
An additional reason given was that Great Eastern shares have low liquidity, making it difficult for the company to conduct share buybacks to reward managers with Great Eastern shares.
But in the first place, if liquidity is low, why should Great Eastern stay listed? It is perpetually undervalued, and few people want to trade it. End the pain for everyone. OCBC should delist it, and finally, it’s doing so. This delisting offer, coinciding with the recent minority shareholders’ complaints, is too uncanny, and I believe it’s a way to resolve the issue and prevent it from getting out of hand.
The offer price of S$25.60 represents a 36.9% premium over the last traded price of S$18.70. It’s also 27.7% above the 5-year volume-weighted average price, which makes it seem like a good premium. However, the embedded value is the true measure of an insurance company’s worth. Great Eastern reported an embedded value of S$17,320 million in FY2023, which translates to a per-share value of S$36.59. As such, the offer is a 30% discount to Great Eastern’s actual value!
I believe OCBC should simply offer the embedded value. It wouldn’t cost much more, but it would save its reputation and that of Great Eastern, which are worth far more than the monetary value involved. Don’t leave a sour taste among the minority shareholders and let this saga escalate.
Disclaimer: I am neither an OCBC nor a Great Eastern shareholder, and I am not a financial advisor. I am simply stating my views on the matter as I personally felt some things were unjust.