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Price war begins for SPH

  • KEP raises its final privatisation offer for SPH to S$2.351 with an additional S$0.20/share in cash, bringing the total cash outlay to S$1.4bn.
  • Some of KEP’s plans for SPH include monetising non-core assets such as good class bungalows in Singapore (fair value S$144m).
  • SPH is a big gainer. Potential competing offers including general offer by 1 Dec could be a share price overhang for KEP, KREIT and SPH REIT.

Keppel increases final offer to S$2.351; higher cash of $0.20

Responding to the all-cash unsolicited offer by Cuscaden Peak on 29 Oct, KEP has raised its offer to S$2.351/share by raising the cash component of the consideration from S$0.668/share to S$0.868/share. No change in units offer in KREIT (0.596 units/share)
and SPH REIT (0.782 units/share). The revised offer is 12% higher than its original offer of S$2.099 and Cuscaden Peak’s S$2.10. It represents a premium of 7.9% to SPH’s FY21 proforma net asset value/share of S$2.184, implying a total equity value for SPH of S$3.8bn. The revised offer is final and will not be adjusted for SPH’s FY21 final dividend of S$0.03/share. SPH is not precluded from entering into another implementation agreement with other parties (including Cuscaden) before 17 Nov 2021. The deadline for any general offer would be 1 Dec 2021, 7 days before EGM is held on the indicative date of 8 Dec 2021 to approve the KEP/SPH scheme. SPH has to pay a breakup fee of S$34m to KEP if a competing offer is effective. The media business restructuring would be completed around 1 Dec 2021 after which any shareholder could freely own more than 5% of SPH.

What should SPH shareholders do?

Nothing for now. The revised offer represents an 8.8% premium to the last closing price. We do not discount the possibility of more competing offers for SPH as the revised offer by KEP is still at a 10% discount to our equity value per share of S$2.64. We understand that SPH continues to engage Cuscaden for a better offer. Cuscaden has received the necessary in-principle regulatory approvals except for clearance from the Foreign Investment Review Board in Australia. With low risk of regulatory approval, a higher allcash with a chain offer for SPH REIT could be viewed as a better offer vs. KEP’s.

Is it worth it for KEP?

The higher cash offer by KEP is not unexpected and not too aggressive, in our view, resulting in an additional outlay of c.S$325m or S$1.4bn in total. Proforma net gearing will increase by 0.03x with net gearing expected to remain <1x (9M21: 0.76x). If successful, management would look to monetise non-core assets (estimated at about S$1.4bn) and see potential for higher dividend payout. This includes S$144m for Good Class Bungalow in Singapore (see Fig 2). If the deal is off, we think KEP may have to look harder in trying to find similar assets that yield recurring income, although asset monetisation plan of S$5bn by 2023 is unaffected. We think integrating SPH’s portfolio into Keppel Capital’s asset under management (AUM) is a low hanging fruit to execute its 2025/2030 vision to grow its ROE to 15%. However, KEP’s share price could be under pressure during the open window from now until 1 Dec.

Shor-term overhang for K-REIT and SPH REIT

KREIT and SPH REIT’s share prices have appreciated by 10.5% and 4%, respectively, since the possible offer by Cuscaden on 29 Oct 2021. We expect the revised offer by Keppel which used the units of both REITs to part fund the acquisition to cause price
overhang for both KREIT and SPH REIT. In particular, SPH REIT’s share price could be capped at S$0.946 (minimum chain offer price by Cuscaden). However, if the privatisation of SPH by KEP materialises, the potential merger between the two REITs and higher free float would serve as re-rating catalysts. ROFR granted to SPH REIT will remain in place. Note that the share price of K-REIT could swing positively if Cuscaden counters with a higher cash offer that is more compelling than S$2.10.