Readers may well be aware of the TradeGlobal (TG) saga at Singapore Post Limited (SGX: S08) (“SingPost”). The company took a massive impairment charge of $185.0 million for the eCommerce subsidiary in the final quarter of FY2016/17. SingPost had previously paid $236 million to acquire the 96.3% stake from private equity firm Bregal Sagemount in October 2015. This impairment wiped off nearly 80% of the deal value.
|Figure 1. TradeGlobal logo.|
Earlier this year, SingPost had appointed WongPartnership (“WongP”) as legal counsel to review the TG Acquisition, and also appointed FTI Consulting to assess the adequacy of the financial and commercial due diligence performed in relation to the transaction. On 17 July 2017, SingPost submitted a preliminary report of the review to the Singapore Exchange. You can download the report here. Straits Times had published a summary of the report. You can read it here.
The report proved pretty damning. It revealed that SingPost (or to be precise, SingPost’s board of directors) failed to cover pertinent issues before going ahead with the acquisition in 2015. There were red flags that should have been raised during the due diligence process, but were not.
One red flag is that SingPost’s intended purchase price for TG was much higher than what previous owner Bregal Sagemount had paid. SingPost’s board came to know this information a week before the signing of the purchase agreement, but no further due diligence was carried out.
Another red flag is that TG’s main subsidiary had significantly underperformed its forecasts in the two fiscal years before SingPost’s acquisition. In the preliminary report, WongP wrote,
“The significant underperformance in the years immediately prior to the TG Acquisition, in view of the Aggressive Forecast Risk, warranted greater scepticism as to the achievability of the forecasts, and a more conservative valuation of TG may have been arrived at following an examination in greater detail of previous and current forecasts.”
WongP added further that,
“Where forecasts of a target company’s performance are potentially aggressive, it would have been best practice to explicitly consider the implication of historical multiples on the valuation of TG. Despite the Aggressive Forecast Risk, the valuations presented to the Board were based only on forecasts, and no valuations based on historical multiples were presented.”
In short, SingPost did not fully consider all angles before proceeding with the acquisition. But to be fair to SingPost’s board of directors, it is mind boggling, or nearly impossible – “nearly impossible” because in hindsight, everything looks possible – to take every speck of data into consideration before arriving at a business decision. (Imagine if you have to carefully weigh your choice of food between the calories and reviewers’ ratings on HungryGoWhere, would you still be able to have any lunch at all?)
The Road Ahead
My apologies to SingPost shareholders (my wife included) if my analogy isn’t appropriate. SingPost’s board of directors should have taken a more conservative stance, since we are talking about multi-million dollar acquisitions, not ten dollar lunches here. Investors have reacted bearishly since the FY2016/17 results release. The stock had plunged 11 per cent before recovering to a loss of 2.9 per cent till date.
|Figure 2. SingPost’s price movement since FY2016/17 results release.|
At this point, the damage is done. The impairment charge has been taken, and SingPost’s management is now executing a turnaround plan for TG. What lies ahead for SingPost from here?
In my next post, I review contemporary research on the prospects of various business segments that SingPost operates in.
Watch this space.
The Eleutherian Odyssey