Hi readers,
This week, we see Keppel Corp offering to take over SPH. The company was formed in the year 1984 with the merger of 3 organisations, namely The Straits Times Press Group, Singapore News and Publications Limited and Times Publishing Berhad.
It is rather sad that another one of those old names will be “gone” soon. We have seen a number of M&A activities on the traditional companies listed in the Singapore Exchange in the last few years. I believe that it wouldn’t be the last. As the business environment changes, these companies are forced to innovate with the latest trend being “asset-light” business formats.
It wouldn’t be asset light for Keppel Corporation for this acquisition but it does create some value for the shareholders of the respective companies. The price offered to SPH shareholders is S$2.09 per share, comprising a combination of cash and shares in Keppel Reit and SPH Reit.
The offer is priced at 1x Price to Net Asset Value of SPH, excluding the media business. At this valuation compared with the past similar acquisitions in Singapore, it seems rather fair to SPH shareholders. For the record, Keppel Land was taken private at 0.88x P/NAV and Wheelock Properties was priced at 0.81x P/NAV.
In a nutshell, the shareholders are still “owning” SPH after the M&A goes through as they are given SPH Reit shares, which is generating the bulk of the income for SPH anyway.
Personal opinion after the acquisition
As Keppel Corp is looking at asset monetising, in which they have already monetise S$2.3 billion so far, i believe that there is a possibility in the near future that the assets from the acquisition can be monetised as well. There are some assets within that portfolio which is liquid and can be easily monetised, just a question of price. In the midst of Keppel Corp pursuit of an asset-light business, i see a high probability for that happening. If this happens, at the right price, i see an unlock of shareholders value for Keppel Corporation shareholders.
Keppel Corp may inject retail assets from Keppel Land’s portfolio into SPH Reits, in which in itself, is monetising its own balance sheet as well. This will create synergy as SPH reit is currently holding three local retail malls, namely The Clementi Mall, The Rail mall and Paragon. Cost efficiency is another benefit that SPH Reit will enjoy if these injections take place. And of course, ultimately, Keppel Corp will benefit as well as they are the owner.
Another possibility is asset recycling, in which the assets from Keppel Land and SPH Reit can be combined to form another new REIT. This is another way to unlock value for shareholders, but i believe the most benefits go to Keppel Corp in such a move.
Another possibility is merging SPH Reit with Keppel Reit. Based on current market capitalisation of both reits, if combined, it will form a commercial reit of a market cap of approximately S$7 billion. This will make it the 6th largest Reit by market capitalisation int e SReits space. But a combination of these two entities will dilute the specialisation of each of these two reits. Keppel Reit being the only pure office play reit here in singapore, to me is a draw. As a Keppel Reit shareholder, i would rather wish that the merger don’t happen as i feel that there is value in Keppel Reit being a pure play on office spaace.
According to Keppel Corp’s CFO, the acquisition will immediately improve EPS by 6%, and ROE to 5.8%. So this is good news for Keppel Corp shareholders, but of course, the forecast is based on historical data.
From the acquisition, keppel Corp is expecting to add another S$50m of fees in terms of revenue topline. This is about 50 basis points of the S$10 billion in addition to the company’s AUM. This is typical of the fee structure that the company is employing for its AUM. With larger scale of AUM, i believe that the EBITDA margins will improve due to management efficiencies.
The funding of the acquisition using part cash and part keppel reit is not so positive for the keppel reit shareholders. This is because keppel reit units are priced below NAV for this deal. After the acquisition, keppel corp will only own around 20% of Keppel Reit from the current 46%. But the reduction of shareholdings is most probably due to Keppel Corp’s strategy of going asset-light, not that Keppel Reit is not doing well. By using keppel reit as part payment, the company ensures that gearing stays below 1x as they are using less cash. Ultimately, the main beneficiary here is Keppel Corp. Other than the pricing of Keppel Reit for this transaction, i believe it will be Business-as-usual for Keppel Reit, just some knee jerk reaction to the price of the Reit in the market.
Summary
The acquisition price seems to be on the higher side, in my humble opinion, in view of historical records of similar deals here in Singapore. But of course, both companies belong to Temasek and the face-factor might be one of the consideration when Keppel Corp went in on the acquisition. It is no wonder that SPH directors have mentioned that this is the best deal form the multiple offers that the company received so far.
Ultimately, I believe in the longer term, this acquisition is good for Keppel Corp as it continues its journey towards its Vision 2030. The company has set a ROE target of 15% going forward and that is a pretty stretched target.
With many old economies stocks in Singapore going through different forms of restructuring these few years, it is good news for the Singapore Market participants generally.
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