Temasek pays US$5.7b for quarter of Watson

Singapore

FRESH on the heels of making a cash offer for Olam International, Singapore's Temasek Holdings has now inked a deal to take up a substantial stake in Li Ka-shing's AS Watson, the world's largest international health and beauty retailer.

While some have suggested that the move puts paid to the Hong Kong tycoon's plans to publicly list AS Watson, Temasek has confirmed that a public offering of AS Watson shares - including its own newly acquired stake - is still on the cards.

Temasek said in a statement yesterday that it will be paying US$5.7 billion in cash for a 24.95 per cent stake in AS Watson, perhaps best known for its Watsons drugstores all over Asia, including Singapore.

Hutchison Whampoa, Mr Li's telecommunications and retail flagship and also AS Watson's parent, will hold on to the remaining 75.05 per cent.

Temasek said the move will "increase its exposure to the consumer retail sector, with a balanced focus on a growing Asia and a recovering Europe".

Its purchase price for the quarter stake comes in just under the valuation put on AS Watson by analysts recently. Based on Hutchison's most recent set of results out in February, analysts have valued AS Watson at between US$22.3 billion (Nomura) and US$34.4 billion (Morgan Stanley).

Taking the average of valuations done by 11 analysts yields a figure of US$26.8 billion - which equates to a value of US$6.6 billion for a 24.95 per cent stake, or about US$1 billion more than what Temasek is paying. Hutchison's group managing director Canning Fok also said recently that, based on the group's own collation of data, the average valuation estimate for AS Watson from analysts is HK$195 billion (US$25.1 billion), which would translate to US$6.26 billion for a 24.95 per cent stake.

These valuations exclude AS Watson's Marionnaud business - the largest perfumeries & cosmetics retailer in Europe; Hutchison had indicated Marionnaud would be excluded from any share sale of AS Watson, as it is undergoing a refurbishment programme.

When asked, Temasek confirmed that its purchase of a 24.95 per cent stake in AS Watson excludes the Marionnaud business. It does, however, include AS Watson's other well-known brands, such as Hong Kong's top supermarket brand ParknShop, its top electronics retailer Fortress, and one of the United Kingdom's leading health & beauty retailers, Superdrug.

AS Watson has more than 10,500 stores, operating 14 retail brands, in 25 markets around the world. Its Watsons brand alone operates over 4,000 stores and more than 900 pharmacies in nine Asian markets.

It explains why AS Watson's anticipated public listing was expected to be the world's largest since AIA Group's US$20.4 billion offering in 2010. Rumours were floated as early as October last year that Hutchison was considering selling shares in AS Watson, in an initial public offering (IPO) worth some HK$98 billion.

Just a few weeks ago, Mr Li himself said Hutchison hoped to spin off AS Watson for a listing in Hong Kong and an overseas market this year, after reporting better-than-expected earnings for last year.

The Financial Times, quoting two people familiar with the deal, reported yesterday that Temasek's acquisition of the quarter stake in AS Watson "scuppers . . . plans by Asian tycoon Li Ka-shing to list his AS Watson health and beauty chain". One of its sources said Hutchison roped in Temasek as a strategic investor as it was feeling "jittery about an IPO".

However, when asked by The Business Times if this deal would affect AS Watson's listing plans, Temasek said: "Hutchison and Temasek have agreed to work together towards listing AS Watson at a suitable time."

It is believed that there is still scope for a dual listing, with the second market likely being Singapore, given Temasek's interest.

Hutchison's announcement to the Hong Kong Stock Exchange yesterday also confirmed that such listing plans are still on the cards. It also said that the "strategic alliance" with Temasek would maximise the value of AS Watson.

"The transaction will allow the group to partially unlock the value of its AS Watson group of businesses and set an important valuation benchmark for the group's remaining interests," it said.

Temasek's head of Investment Group, Chia Song Hwee, said Temasek shares AS Watson's "philosophy to invest and build businesses for the long term, especially in Asia".

"AS Watson is a well-established company with a proven management team, a valuable franchise and a good growth story. The consumer retail sector is a good proxy to growing middle income populations and transforming economies. This is very much part of our investment themes as we shape Temasek's portfolio for the long term," he said.

In the consumer retail space, Temasek has a 3 per cent stake - valued at HK$89 million as at March 31, 2013 - in Li & Fung, Hong Kong's multinational consumer goods group.

"We continue to believe in the growth opportunities and long-term prospects of Asia, particularly China, and a recovering Europe," Mr Chia added.

AS Watson's audited net assets value attributable to its shareholders was HK$9.2 billion, as at Dec 29, 2013, according to Hutchison's filing. Its audited net profit after tax and extraordinary items for FY2012 and FY2013 were HK$6.9 billion and HK$7.8 billion, respectively.