Tuesday, October 22, 2013

ReHo Pulls the Sewko Holdings IPO

As a follow up to a previous post this summer, Retail Holdings ("ReHo") stated they were planning a sale of a portion of their equity interest in Singer Asia via a listing of a newly formed holding company Sewko Holdings (which in turn owns 100% of Singer Asia) in Singapore.  Unfortunately, the IPO date has been pushed back to sometime in 2014.  I'm not entirely sure what to make of this announcement as the markets, at least in the US, are at all time highs and it appears like a great time to come public.  I can only assume that they were unable to get a valuation close to the underlying value of the operating subsidiaries as that's been a target value in past annual reports.  ReHo has also done this before when they announced the sale of the Bangladesh subsidiary before terminating that agreement due to market conditions.  Is over promising and under delivering starting to become a pattern?

Checking in on the sum of the parts analysis of ReHo's valuation (cash has been reduced by the $1 per share dividend):

ReHo still seems very cheap at current levels, even if an IPO is a year off.  But why was the IPO delayed?

There was a Seeking Alpha article published a little over a month ago that did a good job of laying out the liquidation thesis, but a few commenters pointed out that an IPO might not close the valuation gap because Sewko would still be a holding company of publicly traded subsidiaries and still deserved a conglomerate discount.  I had the link to the preliminary prospectus, but its now dead, luckily I printed out the corporate structure and ownership as I was struggling with the question of whether Sewko deserves a discount.  The publicly traded subsidiaries are highlighted in yellow.  Hopefully its readable.

Sewko Prelim Prospectus
All of the operating subsidiaries other than Singer Thailand are controlled companies and majority owned.  Throughout the now dead draft prospectus, Sewko gave the impression that they control all of these subsidiaries and that they're essentially operated as one Singer.  I'd also argue that the market is relatively efficient and would price the operating subsidiaries at a discount in their home markets given the ownership structure and the minority shareholder position.  But it's still an issue that potentially prevents ReHo from realizing the full value out of a Sewko IPO.

I've also been corresponding with another ReHo shareholder that has concerns about the company's lack of operating cash flow for the past several years, which is certainly a bit concerning on the surface, but given the complexities of the consolidated accounting rules and different holding company structures I hope there's a good explanation?

Given the failed IPO, I think its wise to be a bit skeptical of the full NAV as a short term price target.  I'm open to any thoughts or comments from other holders on why the IPO might have been pulled, but these were a few thoughts I had today after hearing the bad news.  I'm still holding, but my conviction in the liquidation thesis has been taken down a notch, it might be time to take a closer look under the hood.

Disclosure: I own shares of RHDGF


  1. Interesting to see the volume of shares traded at end of 2013 and start of 2014. Based on the IPO prospectus which has been deleted we saw results into 3rd quarter and they were strong. I believe end of year figures to be strong versus 2012 and a new try by management to maximize value by IPO or other avenues. This is a consumer play in emerging markets with a strong brand.

    1. Thanks for the comment, I agree with your overall sentiment and hope a deal gets done this year. ReHo remains an attractive risk/reward proposition, safe backdoor way of playing the EM middle class.