Jeffrey Tan, Samantha Chiew, Thiveyen Kathirrasan Published on Fri, Jul 02, 2021 

One after another, Temasek-linked companies have come under some form of restructuring or M&A exercise. What are the reasons behind it and which are the next likely candidates?

Sometimes, investment decisions are about making hard-nosed choices, especially when a business faces an existential threat. From CapitaLand and Singapore Airlines to Sembcorp Marine and Singapore Telecommunications (Singtel), there now appears to be a discernible shift in the logic behind the M&A or restructuring activities of companies linked to Singapore’s sovereign wealth fund Temasek Holdings, otherwise known as Temasek-linked companies or TLCs: Survival is now the name of the game.

According to Thilan Wickramasinghe, Singapore’s head of research at Maybank Kim Eng, the ongoing slew of corporate restructuring and M&A activities, in general, is “hyper-accelerated” because of the Covid-19 pandemic. “Operating environments are permanently and structurally changing,” he says. “This has created a crunch for businesses to adapt and realign their strategies to stay relevant while also ensuring long-term growth,” he adds.

Take Keppel Corp for example. Last May, the group announced its Vision 2030. A month later, Sembcorp Industries and SembMarine announced a demerger and SembMarine announced a rights issue to raise $2.1 billion, of which $1.5 billion was used to repay Sembcorp for an intercompany loan. Fast forward to June 24 and Keppel Corp has agreed to enter into exclusive talks with SembMarine to combine Keppel Offshore & Marine and Semb­Marine. According to the companies, the combined entity will be better positioned to capitalise on the trend of decarbonisation to build renewal energy infrastructure like offshore wind farms and address challenges in the offshore and marine industry which is undergoing consolidation due to depressed crude prices.

Under long-time CEO Ho Ching, Temasek has been relatively passive. But Ho will relinquish her role come Oct 1 and be replaced by CEO-in-waiting Dilhan Pillay Sandrasegara, who joined in 2010 and has had two decades of experience as an M&A lawyer which should keep him busy in the next few years.

In 2020, Temasek suffered its worst year since 2016 and warned a second wave of Covid-19 infections could further hamper global markets. It reported preliminary total shareholder returns of –2.3% in the year ended March 31 while its net portfolio value fell to $306 billion from $313 billion a year earlier. Dividend income came in at $12 billion with a yield of 3.9%. Temasek will be publishing its latest annual review on July 13, where its management is expected to shed more light on its current strategies.

Telco and two banks next?

So, which is the next company in Temasek’s portfolio to undergo a restructuring or “strategic reset”? Market watchers say this is likely to be Singtel. In a multi-part, multi-stage process, the telco has written down the value of underperforming units, is engaging with potential buyers for its stake in regional associates and exploring ways to unlock the value of its infrastructure and data centre assets worth more than $5 billion in total, estimates DBS. The telco has also identified new key markets to go after. (see sidebar on Singtel)

While Temasek has built an increasingly diverse portfolio across practically every major industry over the decades, its stakes in the financial services sector make up 23% of its portfolio as at March 31, 2020. This is closely followed by telcos, media and technology at 21%.

Within the financial services sector, Temasek’s key asset is 29.67%-owned DBS Group Holdings. Over the past decade, DBS has returned more than 200% excluding dividends. At the end of 2010, its market capitalisation was just $32 billion but this rose to almost $64 billion by the end of 2020 and $76 billion currently.

DBS has also shown steadily growing earnings. In 2010, DBS’s net profit was just $2.5 billion. By FY2019, it had grown to more than $6 billion, before receding to $4.77 billion in the year of the pandemic (see Table 1).

Meanwhile, Temasek’s other large investment in financial services is 16.01%-owned Standard Chartered. The second and third largest shareholders are BlackRock and state-owned Norges Bank with 5.55% and 3.93% respectively.

UK-incorporated StanChart is more than twice as old as DBS and has a much larger footprint, operating in 59 markets. In contrast, StanChart’s past decade has been a struggle. From earnings of US$4.2 billion in FY2010, this dropped to just US$1.2 billion in FY2020. Unsurprisingly, its market value has shrunk correspondingly from US$63 billion at the end of 2010 to US$20 billion at the end of 2020.

Other acquisitions by DBS

To be sure, a DBS-StanChart combination has been talked about for years — just like the potential merger of Keppel’s offshore unit and SembMarine. In 2016, following a net loss reported by StanChart, CEO Piyush Gupta had said DBS wasn’t interested in acquiring parts or all of StanChart when the question was raised in the past. At four times DBS’s size at that time, a merger with StanChart would “consume DBS for three years”, he figured.

So, instead of bulking up for the sake of acquiring a competitor, Gupta steered DBS to focus on digitalisation where better operational efficiencies could be captured along with incremental growth in the top line too. In 2016, DBS even launched a digibank in India.

At one point, Gupta said Jack Ma’s Alibaba Group Holdings and his financial services entity Ant Group — rather than competition with other banks — were what kept him awake at night.

But with Ant’s mega IPO abandoned at the 11th hour by the Chinese government, followed by an ongoing period of tighter controls, Gupta should be able to sleep sweeter at night.

DBS has been bulking up in other ways too. Last December, as directed by the Reserve Bank of India, it completed the $463 million “amalgamation” of troubled local lender Lakshmi Vilas Bank. According to Gupta at DBS’s 1QFY2021 ended March results briefing, it would take a few quarters to make the acquisition earnings accretive.

More recently, in April, DBS announced the $1.08 billion acquisition of a 13% share in Shenzhen Rural Commercial Bank (SZRCB). According to Gupta, having a stake in this bank gives DBS game-changing access to a market of 170,000 SME customers in the Greater Bay Area of southern China where plenty of manufacturing activity is taking place. “We can go deeper into the supply chain by leveraging our digital capabilities. We can also provide international services for the customers,” he said at the same briefing.

With China lifting the cap on foreign ownership in the financial services sector last April, DBS is probably eyeing the remaining 87% of SZRCB. “As the bank continues to grow, it will require more capital. Thus, I believe that we have opportunities to increase our stake in this bank. Overall, this deal is a good growth platform for us and is immediately accretive to our earnings,” Gupta says.

Partners in more ways than one

In contrast to the curbs on non-banking, non-core businesses imposed on local banks in the wake of the Asian Financial Crisis, there is seemingly more leeway today. The Monetary Authority of Singapore (MAS) allows banks to deploy up to 10% of total capital outside their traditional business. According to Gupta, DBS has already made nugget-sized investments of a few million dollars each in the emerging FinTech and digital ecosystems that are outside its core but can add value to the bank.

One “entry point” for DBS would be to offer its technological capabilities and provide infrastructure services for a wider ecosystem. “The aim would be to access a broader revenue stream by playing to our strengths as opposed to entering completely new businesses that we don’t understand,” he says.

This is where StanChart comes into the picture again. In October 2020, DBS partnered StanChart and 12 other banks to create a digital Trade Finance Registry (TFR) proof of concept (POC) developed on a blockchain network to enhance lending practices and improve transparency in commodity trades.

In April, DBS, JP Morgan and Temasek announced plans to develop an open blockchain-based platform to accelerate payments, trade and foreign exchange settlement through a new company, Partior, starting with the US and Singapore dollar. “We are actively bringing in other banks so that the euro, sterling, renminbi and other currencies become part of the system. And if we can do that, we will be an important part of a game-changing infrastructure for payments,” says Gupta. Separately, DBS, together with StanChart, Temasek and SGX, have set up Climate Impact X carbon exchange which should go live later this year.

Another possible area of cooperation between StanChart and DBS could involve Citigroup’s sale of assets in Southeast Asia. “We have said before, we are always open to assets that can add to our franchise in countries where we are already present. The ANZ deal in 2018 gave us scale and was very accretive,” said Gupta in an April 30 briefing.

However, he is quick to add that the bank will adopt a very disciplined approach. “The economics must make sense and we must have the capacity to integrate. If there turns out to be a bidding frenzy, you might not see us in the middle of that,” he says.

On his part, StanChart CEO Bill Winters is keen to scoop up some — but not all — of Citi’s assets if put up for sale. For example, StanChart itself had exited from Thailand and the Philippines and it had never had a retail presence in Australia. “So, there are some things that probably make less sense for us. But in the other markets, Citi has got some good businesses and they could be complementary to ours,” said Winters in an interview with Goldman Sachs analysts on June 10.

Hefty discount to NAV

To be sure, given its relatively stronger financial position, DBS can afford to have a bigger appetite. In contrast, StanChart is trading at a discount to its book value — a disadvantage acknowledged by Winters when it comes to making accretive deals. “We would look at any material acquisition through the lens of what else we could be doing with that capital in terms of the rest of our operating businesses or the rest of our investment portfolio, fully recognising that our stock is trading at a deep discount to book,” he says.

A full DBS-StanChart merger is also unlikely because of their overlapping presence in India and China and Africa, a continent DBS may not be interested in, market observers note. However, StanChart could realise greater value if parts of it were broken up and divested. Also, it could continue its business in Africa. Like Citi, StanChart’s India, China and Hong Kong franchise could be of interest to other Asian banks including homegrown United Overseas Bank and Oversea-Chinese Banking Corp.

Moreover, analysts are looking at StanChart not as an acquirer but as a rebound play, given growth prospects are resuming. In a recent report, Deutsche Bank notes that StanChart is the cheapest of the UK banks at 7.0 times 2023 earnings and 0.5 times trailing book value.

The consensus estimates by the analysts peg StanChart’s FY2022 revenue growth at only 4%–5% for FY2023 even though the bank has itself guided for 5%–7% for FY2022. “We think this is comfortably achievable with local bank growth expectations for 2022 of 9% in China; 8% in Hong Kong; 7% in Singapore covering the majority of StanChart’s geographic exposure,” notes Deutsche Bank.

“In addition, with risk-weighted asset growth less than asset growth, we expect this leaves StanChart in a comfortable position to increase its dividend and buyback this year and a total return yield of 22% in 2021–2023 compares favourably to other UK banks,” the Deutsche report adds.

Meanwhile, DBS is primed for growth with its earnings accretive acquisitions, its digital initiatives, and analysts very much on its side. But whether the next 10 years are as good as the past 10 years is anyone’s guess.

Other potential combinations

Singapore Press Holdings (SPH) is not a Temasek-linked company but as the property and media company is restructured, Temasek-linked companies are likely to be interested in its assets, says a June 21 report by CGS-CIMB’s Eing Kar Mei and Lim Siew Khee. Whether this results in a further break-up of SPH remains to be seen but shareholders may get higher returns should that happen.

But who would be interested in SPH without the former core media business? According to the CGS-CIMB analysts, “practically anyone” ranging from strategic investors and real estate funds, including some of the real estate funds/companies that have similar exposures as SPH, including ARA Asset Management, Brookfield, Mapletree Investments, Metro Holdings and Savills Investment Management. SPH could also be a good fit for Keppel Corp, they reckon.

Over the years, SPH and Keppel had shared joint ownership and legacy investments, including stakes in M1, KBS Prime US REIT as well as the data centre development at Genting Lane. Eing and Lim suggest that Keppel could take a strategic stake in SPH for ease of partnership with Keppel Capital to grow the asset management segment in purpose-built student accommodation (PBSA) and senior living space.

Keppel could also take over SPH’s 16.1% stake in M1 and make the telco its fully-owned unit, given how connectivity has been flagged as one of the four key pillars that forms Keppel’s Vision 2030 plan, with energy/environment, urban development and asset management the other three pillars, the analysts say. Elsewhere, Keppel Data Centre could take over SPH’s 40% stake in the Genting Lane data centre upon completion.

In addition, SPH has since 2018 built up a PBSA portfolio valued at around $1 billion. According to market observers and investment bankers, SPH wanted to list this portfolio as a REIT last year but the pandemic put a halt to those plans. While listing the PBSA remains a possibility, Mapletree Investments, which is the manager and major shareholder of Mapletree Global Student Accommodation Private Trust with assets under management of US$1.3 billion, could be a keen buyer. The analysts estimate that SPH could make a divestment gain (before taking into account the eventual stake in the listed PBSA) of between $93 million and $156 million, based on divestment yields of between 4.6% and 4.8% versus its average acquisition yield of about 5.2%, based on their estimates.

Busier 2022 in the bigger picture?

To be sure, the restructuring of various Temasek-linked companies is not an anomaly in the broader context. Globally, the pace of M&As is picking up quickly. According to data from Refinitiv, the total value of such transactions as of June this year hit a record US$2.4 trillion, up 158% y-o-y. “As the surging stock market continues to drive confidence and interest rates remain at record lows making borrowing for acquisitions cheap, dealmaking continues at pace,” says Lucille Jones, a deals Intelligence analyst at Refinitiv.

Market professionals here expect the pace of M&A activities to step up. Melissa Ng, M&A partner at Clifford Chance observed an “extremely busy” market towards the end of 2020 and thus far this year, with deals seen across all sectors except travel and leisure. “A lot of new sale processes have launched this year and processes that were put on ice during Covid last year have come back to the market.”

Maybank Kim Eng’s Wickramasinghe, for one, sees the lower interest rate environment supporting post-pandemic recovery while making it more affordable for companies to restructure and consolidate. The shift towards greater emphasis on sustainability is a driver too. “This has also catalysed companies to relook at their business models and make urgent changes to stay relevant and to position themselves for new opportunities,” he adds.

Keoy Soo Earn, regional managing partner, financial advisery, at Deloitte Southeast Asia, similarly expects more deals, with companies going through restructuring offloading their non-core businesses or private equity firms taking profit on their portfolios amid moderation in expectations on the part of the sellers. “The trends we see are growth, transformation and ‘size matters’,” says Keoy.

Stephen Bates, head of transaction services, deal advisery at KPMG in Singapore, believes that M&A will be particularly active in sectors such as core infrastructure, green investments, real estate, and manufacturing. “Given the wave of ‘dry powder’ across the industry and the long-term growth opportunity in the Asean region, we expect 2021 and 2022 to be bumper investment years,” he adds.

However, other market professionals like Chai Koay Ling, head of M&A at RHB Singapore, are careful not to get carried away with the euphoria. “I think companies still have to be mindful that when they consolidate, they have to either preserve value or create value. While consolidation is a key theme to look at, there are also several failed deals. So, valuation remains to be a key critical factor,” she says.