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IN a widely anticipated move, Temasek Holdings has proposed a S$1.2 billion buyout of SMRT Corp to steer the transport operator away from the pressures of staying listed while it faces business pains and transits a just-unveiled new rail model.
The takeover offer by Temasek's wholly-owned Belford Investments, received by SMRT on July 16, a day after details of the new rail financing framework (NRFF) were unveiled, is pegged at S$1.68 cash per share. This values SMRT at some S$2.57 billion and is an 8.7 per cent premium over its last-traded price of S$1.545 last Friday; it is also a 10.7 per cent premium over its three-month volume-weighted average price (VWAP) prior to the last trading day. Trading in the counter resumes on Thursday.
In a joint statement, Temasek and SMRT backed up the privatisation move as one that will provide SMRT with greater flexibility to focus on its primary role - to deliver safe and high quality rail service - without the short-term pressures of being listed even as it makes the transition under the new regulatory framework.
SMRT chairman Koh Yong Guan said: "The NRFF is an improvement on the current framework. However, the company will continue to face significant risks. We do not have any control over fare increases and ridership growth - two key revenue drivers for SMRT Trains."
The firm, which has been beset by many disruptions and breakdowns, is also faced with cost risks, given its ageing and expanded network, which would require more investments for better rail services.
Chia Song Hwee, Temasek International president, said: "We are proposing to move SMRT to private ownership so we can more closely collaborate on system-level transformation."
He added that the privatisation bid would enable minority shareholders to monetise their holdings in SMRT to avoid the uncertainties of the transition under the NRFF, which will kick in on Oct 1.
SMRT will sell its rail assets to the Land Transport Authority for S$991 million under the NRFF. Based on the new charge structure that builds in a revenue-shortfall sharing and a profit-sharing mechanism, SMRT's EBIT margin will be capped at an average of 5 per cent.
Temasek's takeover bid has been structured as a scheme of arrangement, rather than the more-common approach of a general offer; lawyers deem the former a more straightforward route, as it already owns 54 per cent of SMRT.
Temasek senior managing director Juliet Teo, asked at a media briefing late on Wednesday why the firm went for this option, replied: "The objective is not to increase the stake, but to privatise. From that perspective, the scheme allows us to remove the uncertainty to shareholders. It's an all-or-nothing (deal).
"Does it allow us to revise that offer? No. If we fail this round, technically speaking, we have to wait a year out. But we might not have the same view to privatise a year out. So, the opportunity is now."
Credit Suisse is advising Temasek on the deal, while Bank of America Merrill Lynch is advising SMRT; it is understood that SMRT's legal adviser is Wong Partnership.
Based on Merrill Lynch's advice and subject to the advice of an independent financial adviser, SMRT directors view the scheme favourably and support the acquisition.
But not everyone is pleased.
Mano Sabnani, a veteran investor who owns 20,000 SMRT shares, said: "The offer is relatively low."
Exciting times could be ahead with the sale of the rail assets, which would free up SMRT's cash and pare its debt, hence "some of us are prepared to wait out this transition phase", he added.
When asked whether Temasek would bite had it been offered the exact deal (at S$1.68 apiece) for its SMRT block, Mr Chia replied: "Yes. We consider that a fair price and will be prepared to sell our stake. If the offeror has the same objective (as us) to ensure the long-term sustainability of the rail system, then yes, we would be prepared to sell at that price."
Analysts have painted a less sanguine picture of SMRT's prospects since details of the NRFF were unveiled, saying that it does little to dial up the firm's profitability.
Most have also zeroed in on the 5 per cent cap on operating margins - lower than past trends - for its rail operations (inclusive of rental and advertising under trains) in the new charge structure.
There are other concerns. "Without any operating assets, SMRT loses the bargaining power it previously held with ownership. This makes it even easier for it to be replaced by another operator," said Phillip Capital.
Indeed, significant business risks, challenges in the regulatory environment and the profit cap under the new charge structure were factors flagged to provide context for Temasek's privatisation bid for SMRT.
A market observer quipped: "Are things really that gloomy for SMRT? And if they are, does that mean Temasek, a savvy investor, is doing national service by taking SMRT private?"
- Additional reporting by Soon Weilun