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PROPERTY developer UOL Group is poised to buy investment holding company Haw Par Corporation's stake in United Industrial Corporation (UIC) via a share swap, it said on Friday.
This came after days of speculation following the trading halts of three companies linked to veteran banker Wee Cho Yaw. There was talk that he might be restructuring his empire of companies, and a privatisation of UIC could be in the works. The speculation drove the three counters to multi-year highs in the last couple of weeks.
When the speculation proved untrue and the stocks resumed trading on Friday, Haw Par fell one per cent to S$11.20, UIC fell 1.2 per cent to S$3.24 and UOL fell one per cent to S$7.60.
UOL on Friday announced an option agreement which, if exercised, will see it issue 27.3 million new shares to Haw Par in exchange for 60 million UIC shares. On completion, UOL's stake in UIC will increase from 44.71 per cent to about 48.94 per cent. UOL said it has received a waiver from the Securities Industry Council of Singapore and is not obliged to make a mandatory general offer for UIC as a result of the share acquisition, on condition that UOL's stake in UIC does not exceed 49 per cent.
The transaction allows UOL to gain an additional significant stake in UIC which would not otherwise be easily available due to the lack of liquidity in UIC, UOL said. UIC only has a free float of about 13 per cent. "This is in line with UOL's objective of consolidating its interest in UIC, with a view to achieving statutory control (over 50 per cent) of UIC in the future," UOL said. Its statement got market-watchers wondering if the share swap is UOL's first step to privatising UIC.
OCBC Investment Research analyst Eli Lee said an eventual offer cannot be ruled out. "In the hypothetical scenario that UOL achieves control of UIC in the future, in addition to significant operational synergies, we believe that the larger UOL-UIC entity will also find stronger alignment in exploring multiple possibilities for unlocking value from their sizeable combined commercial portfolio. Options may include asset interplay and enhancements, redevelopments or even capital recycling into a real estate investment trust (Reit) structure over the longer term."
In extolling the benefits of the transaction, UOL said that an increased stake in UIC gives it access to UIC's commercial property portfolio, such as Singapore Land Tower and Marina Square, locally. Both UOL and UIC have property interests across the residential, office, retail and hospitality segments in Singapore, China and the United Kingdom. The transaction also allows both groups to collaborate on joint acquisitions of land banks and office and retail investments.
Analysts agree that this is a financially accretive move for UOL. Following the transaction, UOL will account for UIC as a subsidiary. Joy Wang from Deutsche Bank estimates that UOL's net profit will increase by 3 per cent. CIMB analyst Lock Mun Yee believes the transaction will result in a 3 per cent increase in UOL's revalued net asset valuation per share to S$9.98.
OCBC's Mr Lee added that as the domestic housing market draws closer to a cyclical bottom, consolidating its holdings in UIC will help to boost UOL's local residential exposure through UIC's condominium projects. "This is positive particularly as land tenders in Singapore continue to be competitive, with many cash-rich developers, both local and foreign, vying to replenish their dwindling land banks amid improving buyer sentiments."
But what could be the reason for UOL deliberately stopping short of having to make a mandatory general offer for UIC on Friday?
DBS vice-president for group equity research Derek Tan, who has a "buy" call on UOL with a target price of S$8.93, said Mr Wee might not have wanted to mount a capital-intensive takeover because he is already confident of the control UOL has on UIC. For example, UOL already has sufficient representation on the board of UIC. "Now, by not coughing out any cash, UOL can take UIC into its fold in a way that allows it to consolidate its numbers and its position, so that its perceived position as a developer will increase further."
For a period of time before, Mr Wee and Filipino magnate John Gokongwei were locked in a drawn-out tug-of-war as they competed neck-and-neck in their shareholdings in UIC. Both have also launched failed takeover bids for UIC, although some market-watchers believe that they were not genuinely serious about buying out the company and were only using the process to raise their holdings in UIC.
The deal is subject to shareholder and regulatory approvals, with all conditions to be satisfied by Oct 31, 2017.