The play for WBL

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STRAITS Trading is teaming up with investors Aberdeen Asset and Third Avenue to take over the reins at tech firm WBL and jettisoning its hospitality business in a venture with the Far East group. Will the makeover stir interest in its stock?

IT'S makeover time at venerable colonial-era tin, property and hospitality firm Straits Trading Co (STC). Ever since her family's investment holding company Tecity Group clinched control of STC from the Lee family of OCBC group in early 2008, lawyer Chew Gek Khim, granddaughter of OCBC group's late helmsman Tan Chin Tuan, has been quietly plotting to transform the conservative firm into a more dynamic player. Not long after she arrived to take over the reins of STC, the globa financial crisis hit, making it more difficult to charge ahead. But Chew was waiting for just the right time and opportunity to roll out STC's makeover.

Late on the evening of Nov 26, without much fanfare, STC announced two major deals through a short note to the Singapore Exchange. One was to sell off its hospitality business through a partnership with one of the city-state's largest property groups and the other was to boost its stake in stodgy tech and property firm WBL Corp to more than 44%.

The deals, once endorsed by shareholders, will see STC's stake in WBL rise from 17% now to more than 41%. Alongside a 3% stake held by its parent Tecity, STC will control a stake of more than 44.57% in WBL, triggering a mandatory general offer for WBL and will subsequently make a mandatory general offer. STC is offering to buy remaining WBL shares that it does not own for cash or shares worth more than S$500 million. STC is buying a 7.48% stake from Aberdeen Asset Management Asia and 16.13% from Third Avenue Management LLC in an all-share deal worth nearly S$218 million in a share swap at a ratio of one WBL share for 1.07 STC shares.

The market loved the two deals. STC stock soared 8.7% on Nov 27 and continued surging on subsequent days. It was up nearly 17% over the past week and more than 35% from its September lows. Analysts see the deal as transformational for the company, which will be able to consolidate WBL as an associate or subsidiary, depending on the acceptance leve for its general offer. It also adds WBL's automo­tive distribution, technology and propert development to its tin mining and property businesses.

Chew tells The Edge Singapore that, if the deals go ahead as planned, they would be part of the transformation of STC that she has been articulating and planning. "Even if they don't go through for some reason, I hope they will be representative of what we wish to achieve — to transform STC into a holding company with stakes in businesses that are well run and give a reasonable return."

WBL is part of what were once the "seven sisters" companies within the OCBC-Lee family stable that included STC, retailer Robinson & Co, beverage-and-property firm Fraser and Neave (F&N), construction group United Engineers, property firm Bukit Sembawang Estate and Asia Pacific Breweries. OCBC began reshuffling its portfolio more than 12 years ago, following Monetary Authority of Singapore guidelines on non-core assets. Over the years, the Lee family has exited some of the investments in tandem with its flagship bank. Robinson was sold in 2006 to Indonesia's Lipp group, controlled by the billionaire Riady family which two years later sold it to a Middle Eastern group.

In early 2008, OCBC founder Tan's grandchildren, led by Chew, won a protracted battle with the Lee family to take control of STC. In July, the family of Thai billionaire Charoen Sirivadhanabhakdi, who controls Thai Beverage and TCC Assets, agreed to acquire the Lee family's and OCBC's stakes in F&N and Asia Pacific Breweries. Dutch brewer Heineken NV has since moved to take full control of Asia Pacific Breweries, and the Thai family has locked horns with the Riadys to take control of F&N. Besides WBL, of the original "seven sisters", only two remain firmly under the control of OCBC-Lee family: Bukit Sembawang Estates and United Engineers. STC and its parent firm Tecity Group, both of which had stakes in the two companies, swapped shares in 2010, with STC selling its United Engineers stake to Tecity and buying Tecity' WBL stake.

Unlocking value in hospitality segment

On Nov 26, STC also moved to unlock valu at its loss-making hospitality division. It agreed to sell its entire hospitality management business to Far East Orchard, the listed hospitality arm of the late Ng Teng Fong's family. Under the deal, FEOrchard will also acquire a 50% interest in three of STC's hotels in Australia, and STC will have an option to buy up to 20% of FEOrchard's enlarged hospitality management firm. It is also planning to sell its Singapore hotel and property assets to Far East Hospitality Trust.

"The joint venture with Far East group for the hospitality business is a 'win-win' transaction for both parties," Chew says. "The transaction transforms the relatively lower-scale STC hospitality assets into a larger scalable hospitality business, albeit one in which STC will have a smaller stake." She adds that the joint venture is well positioned to serve as a growth platform for both partners in Singa­pore, Australia and Asia-Pacific.

The deal with Aberdeen and Third Avenue adds two highly regarded international institutional investors to the STC shareholder list. Analysts expect STC to take a more activist approach to unlock value at WBL and divest the stodgy tech company of some of its non-strategic businesses. The STC-WBL deal also reunites STC's Chew with veteran Singapore-based value fund manager Hugh Young, who heads Aberdeen Asset's Asian operations. In 2006, Young and Chew, along with several minority shareholders, sealed the fate of Robinson when they agreed to sell their stakes to Lippo. Over the years, many investors, including Young, have prodded WBL's management to shake things up at the diversified group. At times, WBL has stirred as if it had heard the call of investors clearly only to return to its sluggish self. So, why are investors such as Third Avenu and Aberdeen trading their WBL shares for STC shares? Did they sign off because it offered a good exit strategy from WBL that has become sweeter in the wake of a near 20% rise in STC shares in recent days? "We think Straits Trading can bring a bit of extra management to WBL assets," Young tells The Edge Singapore.

Founded in 1906, WBL, formerly called Wearnes, is a hodge-podge collection of assets in the region. It makes flexible printed circuit boards for consumer products such as mobile phones and tablets, largely through its Nasdaq-listed subsidiary Multi-Fineline Electronix (MFLEX). It also distributes cars such as Bentley, BMW, Bugatti, Infiniti, Jaguar, Land Rover, Mazda, McLaren, Renault, Volkswagen and Volvo in several Southeast Asian markets, and has a fledgling property business in Chengdu and Shenyang in China as well as businesses that include systems integration, engineering, sand mining and equipment distribution. Investors say the company is unwieldy and unfocused. A new controlling shareholder that can help break it up, sell off its underperforming parts and grow its core tech and car distribution business would greatly enhance shareholder value. Although STC now clearly has the upper hand at WBL with a 44.5% controlling stake, the key to unlocking real value is what the second-biggest shareholder in the firm would do. Interconnected holdings of the Lee family, its corporate flagship OCBC and the bank's life insurance subsidiary Great Eastern Holdings account for a combined 25% stake in WBL. If the Lees take the bait and sell their stake, it will make STC's job that much easier. But even if they drag their feet or hold out for an improved offer, analysts say it is clear STC will be in the driver's seat.

Asked why Aberdeen was choosing to invest in boring STC, whose shares had languished over the past year with lacklustre performance at its tin mining and smelting business and loss-making hospitality arm, Young says he has had the venerable firm on his radar for a while. With its strong balance sheet, conservative management, undervalued assets, STC is just the sort of company that a value-hunter investor such as himself likes in his portfolio. "We have done our due diligence on Straits Trading," he says. "They do meet our quality criteria."

Given their history with the management at WBL, will Aberdeen and Third Avenue play a more active role as shareholders of STC, particularly in helping it unlock value from its WBL assets? Young says there is always a grey area between active shareholders and activist shareholders. He adds: "We'll certainly do anything to help [Chew and Straits Trading], but I'm sure Straits Trading will want to realise value too."

Chew says: "Given the track records of Aberdeen and Third Avenue, it is highly unlikely that they will be merely passive shareholders." Yet, she is not worried that STC now has two demanding shareholders with activist reputations peering over her shoulders. "We should not view demanding shareholders negatively," she shrugs. "Demanding shareholders are like demanding bosses; they hold the board and management of the investee company to high standards of governance and operations." Indeed, she believes, their presence will help STC improve its own standards of governance and operations, which will in turn help them to be taken more seriously by investors. Chew says STC is open to working with other investee companies from Third Avenue and Aberdeen's contacts as well as networking with other companies as it seeks to transform itself.

Exposed to cyclical tin business

A key drag for STC this year has been its tin business in the wake of softer tin prices. Earl last year, the company dual-listed its Malaysian-based subsidiary Malaysia Smelting Corp on the SGX. "Our exposure to MSC at the STC level is about S$67 million, based on its current market capitalisation, or less than 10% of our own total market value," says Chew. Last year, MSC contributed after-tax profits of S$10.4 million to STC's bottom line. In the first nine months of this year, MSC incurred losses of S$9.5 million. Tin prices are hovering at US$21,400 a tonne. Since January, tin prices have moved in between S$17,000 and S$23,250 a tonne, way below the US$25,000 average price last year.

Does it make sense for STC to keep a chunk of exposure in a cyclical business such as tin? Chew says STC's board will continue to look at the long-term viability of its tin business. The board will look at whether the problems its tin subsidiary faces are short-term, long-term or structural, or whether the problem is endemic to the industry — in which case, it will need to take a hard look at the business to determine whether it should give it up.

Chew's vision is to make STC "a vehicle that is a fair allocator of capital so that, where capital is allocated to a business or asset, the return that it generates is reasonable, given the circumstances and reflective of the risks over the longer term." That's a model that is not dissimilar to that of billionaire investor Warren Buffett's Berkshire Hathaway. "[Whatever it does,] STC will be an active shareholder in the businesses that it owns, whether this be 100% or 20%," says Chew.

Until now, STC shares have been very thinly traded with almost no analyst coverage. Chew has in the past talked about creating liquidity for the company's shareholders by placing out more shares to boost its free float. Chew insists that she remains committed to boosting its free float and enlarging its shareholder base.

"How we achieve that liquidity and when will depend on circumstance and opportunity," she says. The WBL deal, she notes, also provides an option for WBL shareholders to become shareholders in STC if they choose to accept the offer, which in turn could also lead to an increase in its free float. That will enable more investors to partake in a more dynamic STC.

This story first appeared in The Edge Singapore weekly edition of Dec 3-9, 2012.

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