We all encounter situations like this now and then in our journey towards financial freedom.

The company of the shares you bought has been acquired by an even larger company. You can now exit at a price that gives you a premium over your average cost, i.e. you will definitely lock in some profits if you sell to the mandatory general offer by the acquirer. But other investors in the same company suggest that we should reject the general offer so that you can hold out for a higher price.

So what should you do?

The company I’m talking about is Singapore Petroleum Company Limited or SPC. PetrolChina bought over the 45.51% state held by Keppel and thus launched a mandatory general offer (in cash) to acquire the remaining shares of SPC.

I was fortunate in that I had bought SPC at prices around $6 as well as $2 so my average cost was $4 plus. Thus, the offer by PetrolChina in their mandatory offer meant that I could lock in a confirmed profit of close to $2 a share x number of shares owned.

To sell or not to sell?

Even in situations like this, some people will say, just sell since it’s a sure thing and you don’t even incur brokerage fees for selling. The fear of losing out the bird in your hand due to this unexpected but pleasant turn of events for the company you have invested in is there.

On the other hand, some investors are trying to not sell and see if the lack of supply in the shares would force the acquirer, in this case, PetrolChina to raise its price. It’s the greed part or our self-interested economic motives driving us to hold out for an even better price.

What would you do in this situtation?

Weighing the risks and the benefits

When I heard of the general offer by PetrolChina for SPC and the price of $6.25, I was happy because my average cost was lower so there was some sure gains to be made. So the question in my mind was should I hold out for an even higher price.

I discussed with friends who had invested in SPC as well as visiting forums such as the Channelnewsasia Market Talk on the topic SPC. The sentiments expressed in these various channels varied over time. At the beginning, most of the people were asking the same questions as I was, “Sell now or hold for a better price?”

As more information came out from the following sources:

• SGX announcements
• Discussions in forums about the actual offer document terms and conditions
• SPC’s first half / second quarter results (opens up PDF document)  (21 July 2009)
• Independent financial advisor’s report (opens up PDF document) as well as recommendation by the independent directors of SPC (24 July 2009)
• Views from friends who are into equity investing

After considerating the sources of information above, I’ve decided that the bird I have in my hand is worth two in the bush. Hence, I’ll be selling my stakes in SPC to PetrolChina in the general offer because of the following reasons.

Considerations for selling

I invested in SPC mainly for long-term capital gains and dividends for my daughter. Thus, I had initially wanted to keep SPC for the next 15-20 years to help fund her higher education.

That was the reason I bought into SPC to average down even when its price nose-dived to $2+ during the days after October 2008 during sub-prime crisis until the recent rally due to the takeover by PetrolChina.

However, the acquisition by PetrolChina has introduced some uncertainty into the equation. While overall, the business of SPC is in refining and sale of petroleum products as well as  exploration and production activities hasn’t changed, the fact that PetrolChina’s majority stake allows them to vary the dividend policy as well as change the strategic direction and operational direction of the company as they see fit.

While the offer document indicates that PetrolChina at this point in time doesn’t mean to make any major changes to operations or strategy, they can do so after they’ve wrapped up this mandatory offer.

Continuing to hold out means that I would be bullish on the long-term prospects of SPC under PetrolChina. Some in forums have indicated that with the reduced liquidity in the market for SPC shares, the price has a higher chance of going up above $6.25 if the remaining shareholders do not take up the general offer. This could be possible. But the downside is also possible, i.e.  PetrolChina in their offer document have indicated that it is not their intention to delist SPC should they acquire 90% of the shares.

Hence, it’s probable that they may hit below 90% of shareholding after the general offer closes and are not obliged to either acquire further the remaining shares at $6.25 under Section 215 (1) of the Companies Act or to be compelled by Section 215 (3) of the Companies Act by shareholders to acquire them from those who didn’t accept the general offer.

So the risks are that if I don’t sell to PetrolChina under the general offer, I will have to take a chance with the market and price can go up or it can go down from $6.25.

The recent 2nd quarter and 1st half results were not surprising. Revenue and profits were down compared to 2008.

My tipping point

Ultimately, the main trigger for my decision was the independent financial advisor’s report that accompanied the recommendation by the independent directors. It was pretty clear from the analysis that selling was the recommended option.

Mainly because PetrolChina’s price of $6.25 was a significant premium over the last 12 months traded price for SPC. In addition, Merrill Lynch did a comparision against other oil and gas companies and also other acquisitions to see how this deal fares for shareholders compared to others.

One of the lessons I learn in investing is that profits are not certain until they are realised and you receive the cash. This cash offer from PetrolChina provides that cash and an opportunity to lock in profit. I still have the proceeds and realised gains at my disposal if I accept the offer and can still look out for other opportunities to grow my daughter’s education fund for the next 18 years or so.

In the case of SPC, I was just somewhat lucky that PetrolChina came in at this time. If not, it would have taken SPC sometime before its shares reach the heights as it did back in 2008 prior to subprime.

Be well and prosper.

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