Description

Thesis summary: Golden Energy and Resources (GEAR), is a typical 'heads I win a little, tails I win a lot' special situation investment. GEAR is currently subject to a voluntary delisting and takeover proposal that, if unamended, would return a modest premium versus current prices (83.5c vs 81c last). However I believe it is extremely likely that the current terms of the deal will need to be bumped considerably higher (25-30% or more) given peculiarities with regard to the form and structure of the offer; an implied 80% discount to the readily observable NAV of GEAR's stub value; some interesting aspects of Singaporean takeover rules; and the obvious benefit of even paying up to get this done for the majority owner (as they would still clear >$500mm SGD in value accretion even at bumped terms). Even if the deal were to be dropped, I believe GEAR would trade up, probably substantially, since the original deal was essentially a take-under and the main listed assets of GEAR have appreciated substantially since then.

GEAR trades in Singapore, around $1-2mm SGD a day, with pockets of deeper liquidity. This is a $2.2bn market cap company but the free float is much smaller. As such it is suitable for most all small or mid-sized accounts.

Despite the complex transaction structure this is a very simple thesis and thus the writeup will be brief. Happy to answer any questions or comments.

Background: the current deal

GEAR is a holding company listed in Singapore, with two main assets: a 62.5% stake in Golden Energy Mines (GEMS), a bunch of thermal coal mines in Indonesia, where GEMS is listed and trading; and a 64.01% stake in Stanmore Resources (SMR), a number of coking coal mines in Australia, also, where SMR is listed and trading. GEAR also has a 50% stake in a high-cost Australian gold mine (Ravenswood), unlisted; and a few other investments and a little bit of holding company net debt (call it $100mm or so, maybe near zero as of year-end). 

On November 9, 2022, the Widjaya family - Indonesia's second richest family - made a complex, multi-jurisdiction offer to unwind both GEAR and the Indonesian holdco sitting above GEAR (called DSS, also listed in Indonesia). The Widjayas currently own 59.9% of DSS, which in turn owns 77.5% of GEAR - thus allowing the Widjayas to control GEAR with only 46.5% look-through economic ownership. The purported transactions are as follows:

- a Proposed Distribution of the GEMS shares, either in specie, or via a cash alternative (at a 20% discount), to shareholders directly in GEAR;

- a Voluntary Delisting of the GEAR entity from the SGX;

- a cash Exit Offer of 16c a share for the residual value in GEAR (meaning the SMR stake, the Ravenswood stake, and everything else). 

(Note that DSS, the Indonesian holdco, would be selling its shares in GEAR to the Widjayas at the same price (16c)). The Widjayas are thus moving to 100% ownership in GEAR, post the distribution of GEMS. In other words the Widjayas are taking everything other than the Indonesian coal mines.

In order to accomplish all this, the Widjayas will need DSS shareholder approval (in Indonesia); GEAR shareholder approval, both for the Proposed Distribution, AND the Voluntary/Exit Offer (which are interconditionally tied). Neither approval has yet been achieved; the long stop date for all the transactions was recently extended to August, 2023 (originally was meant to be done by April).

Current deal valuation: amongst the largest extractions of value from minorities I have ever seen

This is a complex deal but since most all the value is in listed entities the valuation math is pretty straightforward. I would make the following observations:

The Proposed Distribution is reasonable: GEMS shares were trading around 7200 IDR when the deal was announced. The deal terms call for either the shares to be delivered, in specie, or, if you cannot receive Indonesian stock certificates (which I believe is the case for most GEAR investors), you get 5500 IDR cash per GEMS share. Given the exchange ratio of 1.3936, this equates to 7665 IDR of value per GEAR share, or 67.4c SGD per GEAR share of cash value from the Proposed Distribution. Note that GEMS shares are highly illiquid; there are few natural owners for thermal coal assets, let alone Indo-listed ones of dubious quality; and the headline valuation of GEMS at around 3x P/E does not look particularly attractive relative to other thermal coal plays. Since any dividended shares are likely to create a wave of selling immediately, getting cash at a 20-25% discount to spot when announced doesn't strike me as a bad outcome.

The Exit Offer is blatant theft: the same however cannot be said for the Exit Offer. Even if we consider Ravenswood to be worthless and everything else inside GEAR to be worthless, the value of the SMR stake - simply from observing traded prices on the ASX - was about 60c SGD per GEAR share, at the time of the deal (when SMR was trading at $2.85 AUD), meaning the original Exit Offer was a huge 74% discount. However since then SMR has rallied hard, and ref latest prices ($3.83 AUD) and current exchange rates this stake is now worth 80c SGD per GEAR share, implying a ludicrous 80% discount at the original Exit Offer price.

Why chances of a bump are very high

1) Singapore Takeover Rules and a potential violation in this case

Singapore doesn't have the best of reputations for good minority outcomes in typical takeovers, but the actual law around Voluntary Delistings and Exit Offers is pretty good. The company - GEAR - has to appoint an independent financial advisor (IFA) to opine on an Exit Offer being both Fair and Reasonable, explaining exactly why the deal meets both criteria (see Rule 1309 in the SGX Mainbook Rules). Then, assuming the fairness opinion comes through, since this is a Voluntary Delisting, 75% of unaffiliated shareholders - that is, only those shareholders outside the 77.5% owned by the Widjaya entity, DSS - would have to approve the Delisting.

The main reason I love this setup is because I believe it will be extremely difficult for the appointed IFA, W Capital Markets Pte Ltd, to conclude this Exit Offer is Fair when there is a liquid, tradeable market for the main residual asset (SMR), that is readily observable and in a good jurisdiction. This is not a case where we are dependent upon a third-party taking a favorable valuation view of an unlisted operating business or some hard assets where valuation nuance is required. There is a liquid, daily market in the key asset that cannot be ignored, and that says the SMR stake is worth 80c to GEAR shareholders, meaning the distance between 16c and 80c is simply miles too wide for even a conflicted arbiter to consider 'fair'.

In an apparent attempt to get around this reality, GEAR has instructed the IFA to consider BOTH the Proposed Distribution Cash Alternative AND the Exit Offer 'when taken together as a single transaction' - a move solely to make the insane discount to residual NAV look less damning. Since this appears in direct violation of the letter of the Mainbook Rules - which state that 'the Exit Offer', and only the Exit Offer - must get a clean Fairness opinion, I have raised this point of law directly via formal complaints to the MAS (Singaporean regulator) and SIC (Singaporean takeover regulator), as well as raising it to the local and Australian press. I have been informed the MAS is investigating the issue and thus I am hopeful this pressure will lead to a positive result.

In any case, even if, somehow, the IFA were to conclude this offer is fair and reasonable, I think it is pretty likely 25% of non-affiliated shareholders - being only 5-6% of the company - will vote against the deal. Keep in mind there is NO NEGATIVE CONSEQUENCE to voting no, since one of the terms of the deal is it has to remain open for 14 days after all conditions have been met, meaning, even if one were to vote no, but the deal ends up passing, you can still then tender your shares for cash after the vote, and so you would not get stuck in the unlisted entity (a threat the Widjayas are attempting to make in their documentation). Obviously, I hope it doesn't come to that but this essentially sets up a 'free roll' dynamic where any sophisticated arb investor will simply buy shares (up to the level of the current consideration) and then vote no, trying to force a better outcome but taking the deal last minute if we can't do better.

2) Potential market manipulation before the deal was announced

On November 8 - the day before this deal was announced - GEAR shares inexplicably fell almost 30%, from above 90c to 65c, before closing at 67.5c. The next day this deal was announced and portrayed as a 'takeover at a premium' deal. There was zero new information, company specific or otherwise, to justify such a massive move in the stock, on heavy volume, but it would seem reasonable to conclude the stock was manipulated lower by associates of the Widjayas in order to justify an effective 'take-under.' WHilst I do not have the ability to prove these allegations, this is obviously highly unusual; has no other explanation in logic; and is deserving of a proper examination. I have also raised this point with regulators, and would expect any pressure that results from this line of inquiry to lead to a better outcome for minorities. One of the main criteria it appears in IFA analyses, looking at other deals, is, are absolute high prices being paid to acquire minority shares? Obviously this is not the case here, for the moment...

3) Paying up to do the deal still makes huge sense for the Widjayas

Obviously, I do not expect to get NAV here but there is a huge 'win win' scenario where the Widjayas can clear a huge windfall but minorities can do much better than currently. As it currently stands, if the transaction were to go ahead, the Widjayas would be accruing something like $900mm SGD in excess value simply by expropriating the minorities in GEAR/DSS (calculated as the difference in value of the GEAR stub, being 80c, less the 16c Exit Offer, multiplied by the increase in economic ownership accomplished through this transaction, ie, 53.5% of the company). Even if the Exit Offer were bumped to a level I consider acceptable - meaning, say, a 40-50% discount to NAV - the Widjayas would still clear $450-565mm in excess gains. Note that a 40-50% discount to NAV is inline with the discount as it traded, in GEAR shares, in the last 3-6 months prior to this transaction, and is, I believe, what the IFA would consider reasonable in a situation like this. 

At a 40-50% discount to Exit Offer NAV, the implied Exit Offer would be something like 40-48c (versus current 16c), implying 29-38% upside versus the current total consideration (83.5c) and yet the Widjayas would still walk away with a huge windfall gain.

Risks:

1) The Widjayas drop the entire scheme: this is possible but I view it as quite unlikely. This is a very complex set of transactions that must have consumed a large amount of time and effort. They have already extended the long stop date once, suggesting a commitment to getting it done. More pertinently, SMR is still an incredibly cheap equity - around 1-1.5x EV/EBIT on my numbers and gushing cash. If coking coal markets remain firm for another six months it could be a $6 stock and then all bets are off. The Widjayas would be much better off paying up 20c, now, in my view, than pulling this and coming back in a few years when SMR could be a multi-bagger.

2) Stock price risk if the deal breaks: I think it is more likely SMR trades up, substantially, on a break, than down. Consider that this was effectively a take-under and the stock was 92-93c before this deal was announced, when SMR was 35% lower. To be fair, GEMS has traded down and thermal markets are weaker, but given the growing importance of SMR in the asset mix and the higher absolute quality of that asset (geography; coking coal; etc), you would expect the NAV discount, perhaps to narrow. Still, GEAR was trading at about a 40% discount to total NAV before this deal, even if it traded at a 50% discount to NAV post the Widjayas walking away it would be a mid-80s stock, so maybe flat to slightly higher. As it is, I am quite bullish on SMR (and own it independently) so would expect GEAR to trade up along with SMR, at least somewhat, absent this deal.

3) IDR/SGD risk: the cash alternative to the Proposed Distribution is exposed to the IDR/SGD currency pair. Volatility here has actually been incredibly low of late, but there is a risk if something really bad happens in Indonesia, your cash value for the Proposed Distribution would get hurt as you are getting paid in IDR.

Catalyst

MAS/SIC formal investigation

Activist emerging

More press coverage on how terrible this deal is at current terms

IFA pushes back and says deal at current terms is not fair

Widjayas fold and offer more