News Alert: Speculated privatization and major asset disposal
- Bloomberg reported this morning that ESR’s major shareholders are considering options inclusive of potential privatization; Interests were also noted looking some of ESR’s major assets
- While the company trade at a deep discount and the possibility of privatization cannot be excluded, we believe there are several obstacles to be addressed for ESR’s major shareholders to take the company private
- Meanwhile, major asset disposal is not impossible in our view, and if done in the right direction, could potentially help to catalyse the company’s share price
Several obstacles may have to be addressed for a potential privatization to come through… Per news report from Bloomberg, major shareholders of ESR are considering options for their stakes in the counter after recording major declines in share prices, inclusive of taking the company private. The company declined to comment on the report. In our view, we do note that ESR has been trading at a meaningful discount to peers (<10x FY24F EV/EBITDA, vs ~15-20x of comparable counters), but there will likely be several obstacles that the company’s major shareholders will have to address for a potential privatization to go through. First and foremost is the fact that there is no one big enough shareholder to initiate this deal. The initiator will likely have to obtain mutual agreements from all three major shareholder parties (i.e. Warburg Pincus (14% shares), OMERS (11% shares) and co-CEOs & senior management team (collectively c.24% shares)). Second, actual support and action will likely have to be provided from all three parties as the amount of dry powder that may be required to take the company private could be sizeable with >52% of ESR’s outstanding shares as free-float held by strategic investors (c.52%). The initiator(s) – assuming that all three major shareholder groups do not oppose the movement and had mutual agreements not to sell their stakes, may have to offer up funding that can exceed the company’s current total market cap, this is before the inclusion of ESR’s net debt position of c.US4.5$bn as at Jun-23. On top of these, ESR’s gearing is currently at a relatively elevated level of 27.6% (on-balance sheet) vs its peers.
…but major asset disposal, if done in the right direction, could potentially help to re-rate ESR’s share price. Bloomberg also noted some preliminary interests are shed on some of ESR’s major assets. We do believe that potential major asset disposals could potentially help to narrow ESR’s current valuation discounts to its peers, which was attributable in part by the company’s significant increase in old economy asset exposure when they acquired ARA back in 2022 (priced at 19.5x EV/EBITDA back then, with old economy portion (i.e. ex-LOGO) at c.17x EV/EBITDA). The acquisition, alongside several other factors and headwinds inclusive of US interest rate hikes, have de-rated the company from 18x forward EV/EBITDA to the current c.9x. The divestment of these non-core old economy assets, if materialized, could help to re-rate ESR’s current valuations.
Latest shareholding structure of ESR
Note: Co-founder & Senior management includes ARA management
Source: HKExnews, DBS HK