Singapore-listed Silverlake Axis ’ privatisation exercise has generated much interest because of its unique dual-pricing structure that is believed to be rare in such deals.
Typically, privatisation bids fail or are prolonged because investors hold out for a higher offer, especially when they know the offeror is close to reaching the minimum level of acceptance required for it to be able to compulsorily take over the rest of the company’s shares.
In Silverlake’s case, the dual-pricing structure by the offeror helped garner a strong acceptance level among minority shareholders in one go, rendering the deal a success.
Investment bankers whom The Edge spoke to say they would not be surprised to see this structure emulated in more privatisation deals in the future.
Some say the structure employed in the Silverlake deal may be a first in Singapore and perhaps even in Malaysia, but The Edge was unable to verify this.
The offer to take Silverlake private, unveiled on Aug 26, came from its founder and executive chairman Goh Peng Ooi and private equity firm Ikhlas Capital Singapore Pte Ltd, collectively known as Zezz-Ikhlas.
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Ikhlas Capital is led by former bankers Tan Sri Nazir Razak, who is the firm’s chairman, and Kenny Kim, the CEO. Nazir used to be the group CEO and, later, chairman of Malaysia’s second-largest banking group CIMB Group Holdings Bhd, while Kim was its group chief financial officer and CEO of strategy and investments.
Zezz-Ikhlas, which held a 74.1% stake in Silverlake at the time of its offer, provided two options to minority shareholders: (1) take 36 cents upfront for each share held, or (2) go for a combination of 30 cents and one new redeemable preference share (RPS) in the capital of the offeror (that is, Zezz-Ikhlas) for each share held, that will be mandatorily redeemed upon five years at 18 cents. The RPS does not carry any voting or dividend rights.
This means that minority shareholders who went for the second option would get 30 cents upfront and 18 cents down the road, for a total of 48 cents. It is noteworthy that the net present value (NPV) and effective cost for the offeror is 40 cents.
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Given that Zezz-Ikhlas owned 74.1% of Silverlake’s shares, it needed, as per takeover rules, to achieve a 90% acceptance of the remaining shares it did not own — in other words, 23.3% out of the 25.9% it did not own — to reach the “squeeze-out” threshold at which it can compulsorily acquire all the shares of minority shareholders that did not accept its offer.
This high squeeze-out threshold made the bid by Zezz-Ikhlas to take Silverlake private particularly challenging.
As it turned out, at the close of Zezz-Ikhlas’ voluntary unconditional offer on Nov 18, it received valid acceptance amounting to 98.33% of the total shares.
“At 98.33%, Zezz-Ikhlas attained one of the highest acceptance levels in recent years for a privatisation, and compulsory acquisition of the remaining shares is currently ongoing,” Kim says, when contacted by The Edge.
Silverlake will be delisted from the Singapore Exchange following the compulsory acquisition of those shares.
Meanwhile, Goh says: “We are delighted to have surpassed the demanding compulsory acquisition threshold of 97.4% (74.1% plus 23.3%) with our innovative offer structure. Silverlake will now be fully owned by Zezz-Ikhlas, allowing us to expedite its business transformation and implement a paradigm shift that will deliver revolutionary solutions for our customers.”
Silverlake provides software solutions and services, particularly to the financial services industry. According to its website, over 40% of the top 20 largest banks in Southeast Asia use its core banking solutions.
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What made it attractive
Zezz-Ikhlas’ offer was structured such that it was able to appeal to three different groups of shareholders with different pay-off expectations, people familiar with the deal say.
Option 1 under the deal, which was a straight cash offer of 36 cents, represented a premium of 25%, 31.9% and 31.9% over Silverlake’s volume-weighted average price for the three-, six- and 12-month period to the last day of trade (Aug 23) prior to the deal being announced. It was also a premium of 20% over Silverlake’s last traded price of 30 cents on Aug 23.
The decent premiums suited minorities seeking cash upfront for an exit.
However, it was Option 2, in which shareholders would get some cash upfront and more on a deferred basis, that was the game changer. This was because it provided shareholders with the ability to obtain a higher total cash payout of 48 cents (versus the company’s NPV of 40 cents), but without Zezz-Ikhlas having to fork out the full amount, as the additional 18 cents would be paid out only five years later.
In a conventional general offer, an offeror would have made a cash offer (in Silverlake’s case, 36 cents), which would likely have had to be bumped up over time (to 40 cents) to gain a higher acceptance.
This strategy can work against the offeror, as seen by the failed bids to go private in recent years. It is also a costlier exercise, as the offeror would have to pay all shareholders the higher offer price, including those who had been satisfied with, and accepted, the lower initial offer.
Option 2 in the Silverlake deal would have suited shareholders who are satisfied with getting 30 cents cash upfront, while reinvesting six cents over five years for a return rate of 25%.
More importantly, the structure also created a situation where new and existing shareholders were mobilised to purchase shares on the open market at a price even higher than 36 cents, so as to have the ability to capture Option 2 for the higher total payout of 48 cents.
This would have suited a third group of shareholders who are happy with getting 30 cents cash upfront while reinvesting more than six cents (depending on their purchase price from the market) for a return rate that is, although less than 25%, still an acceptable rate to them. Indeed, Silverlake’s share price had risen by 23.3% since the offer was made, closing at 37 cents on Nov 18, which was the counter’s last day of trade in the stock market. At 37 cents, Silverlake had a market value of $930.5 million.
It is understood that Zezz-Ikhlas is taking Silverlake private because it is undervalued in the stock market.
In its circular to shareholders, Zezz-Ikhlas — officially known as E21 Pte Ltd in the circular — described its offer as an opportunity for shareholders who may have found it difficult to exit their investment because of the counter’s low trading liquidity.
Silverlake’s average daily trading volume had been low, at about 435,309 shares, 674,255 shares, 947,576 shares and 754,290 shares in the one-, three-, six- and 12-month periods respectively up to Aug 23. Each of these represents less than 0.04% of the company’s total number of issued shares, excluding treasury shares.
Silverlake’s net profit has been trending lower over the last few years despite an increase in revenue. In the last financial year ended June 30, 2024 (FY2024), it reported a net profit of RM105.2 million ($31.8 million), which was 38.2% lower year on year, even as revenue grew to a record high of RM783.5 million from RM765.9 million the year before.
“FY2024 [was] a year filled with many project delivery engagements for a wide variety of clients in the territories we operate in. The majority of projects are executed on time and on budget but there are some where we faced delays for a number of reasons and these projects in some cases impacted our financials in FY2024,” the company said in a review of its financial performance.
Goh, a Malaysian who hails from Penang, kicked off his career at IBM Malaysia and in 1989 founded the Silverlake Group. His daughter, Goh Shiou Ling, is Silverlake’s deputy executive chairman and group CEO.
