Keppel-SPH: Sweet deal, but what next?
Keppel's Vision 2030 will drive its long-term strategy and transformation; the SPH deal has made that vision bigger and bolder
WHEN Keppel Corp made the S$2.2 billion offer to take over Singapore Press Holdings' (SPH) non-media assets, I should have seen it coming. I covered both companies as an analyst during their transformational years and should have intimate knowledge of their increasingly complementary businesses.
I started analysing Keppel back in the year 2000, when then-chief executive Lim Chee Onn was busy consolidating its myriad businesses after taking over from the legendary Sim Kee Boon. From as many as eight listed companies under the group, it quickly reduced to three in fewer than two years as sprawling conglomerates went out of favour.
My SPH coverage was almost a decade later - when it was in the midst of diversifying away from its media business, notably into property.
Both companies are familiar bedfellows, having been joint shareholders of telco M1, the manager of SGX-listed Prime US Reit, as well as a data centre. They even shared a chairman in Lee Boon Yang for over 10 years. Dr Lee stepped down from Keppel's board this April.
For the Keppel-SPH combination to go through, shareholders will need to vote at an extraordinary general meeting slated to take place at the end of the year. Before that, they have to vote on the proposal to hive off the media business on Sept 10.
I know some long-suffering SPH shareholders who feel they got the short end of the stick. But investors have to grapple with the fact that these are very different times.
Back then, the ads from the bellwether The Straits Times Classifieds were an inch thick. Now, the papers struggle to fill up a few pages as online ads have been robbing market share. Indeed, the decline of the media business has been fast and furious over the past five years. It is thus unrealistic to think that SPH will be able to return to its heyday. If SPH had not announced the restructuring exercise, the share price would not have reached anywhere near the current levels.
Once the media is out of the way, the path is paved for Keppel to take over the rest of the SPH business and privatise it. There were over 20 offers made for SPH. While I am not sure about the competing prices, I believe none would come close to Keppel's offer in terms of synergies.
To recap, Keppel will be valuing SPH's non-media business at S$2.099 per share. For every 1,000 SPH shares, shareholders will receive S$668 in cash, 596 Keppel Reit units, and 782 SPH Reit units. The cash component makes up less than a third of the offer, while the two Reits make up the lion's share.
Following the exercise, mall owner SPH Reit looks to have a number of catalysts: the potential injection of Keppel's i12 Katong mall, a larger free float that could allow it to be included in a major real estate investment trust (Reit) index, and a merger with office landlord Keppel Reit. A merger would create the third-largest integrated commercial Reit listed on the Singapore Exchange with a market capitalisation of S$6.9 billion, potentially attracting more liquidity.
Keppel's chief executive officer Loh Chin Hua has said that Keppel will be "supportive of both SPH Reit and Keppel Reit's strategic discussion" to create value, "including potentially creating a more synergistic integrated platform".
Potential spin-offs
A merger of Keppel Reit and SPH Reit would have an impact on Keppel's share price. But these are not the only corporate actions to look forward to. There will be a few potential spin-offs.
The most immediate one should be the listing of SPH's purpose-built student accommodation (PBSA) portfolio. In September 2018, SPH made its maiden purchase in the United Kingdom with some 3,400 beds. The portfolio has since more than doubled to 7,700 beds, worth S$1.43 billion. Earlier in the year, SPH mentioned that this business was ready to be injected into a Reit.
Senior living assets could also be spun off. SPH owns Orange Valley while Keppel acquired a 50 per cent stake in United States' senior housing operator Watermark Retirement Communities via Keppel Capital Senior Living.
Keppel can also do a "CapitaLand". Earlier this year in March, the latter announced plans to privatise its development arm, whose revenue is lumpy in nature, and list its real estate investment manager. The recent sale of Ara Asset Management to ESR Cayman for US$5.2 billion, or an enterprise value of 20 times' earnints before interest, taxes, depreciation and amortisation, set a lofty benchmark for CapitaLand, as well as Keppel Capital if it intends to list its real estate investment manager.
Formed in 2016 to house Keppel's asset management business, Keppel Capital has grown its assets under management (AUM) to S$37 billion, as at end-2020, with a diversified portfolio that includes real estate, infrastructure and data centre assets. Including SPH's existing businesses, Keppel Capital's AUM would rise 27 per cent to S$47 billion.
As a rookie analyst, I initiated coverage on Keppel with a "buy" recommendation. Twenty-one years later, many of the factors driving that call are still in play. Keppel announced its Vision 2030 last year to drive its long-term strategy and transformation, focusing on four key business areas: energy and environment, urban development, connectivity and asset management.
The SPH deal just made the vision bigger and bolder.
- The writer is chief executive of Azure Capital, which manages funds across different strategies.
- Singapore Press Holdings owns and publishes The Business Times.
READ MORE:
- Keppel offers to privatise SPH at S$3.4b valuation; contingent on media business carve-out
- Landmark S$3.4b deal paves way for SPH restructuring, enlarges Keppel's footprint
- Independent financial adviser in favour of SPH's media restructuring
- Keppel unit enters joint venture with Chinese developer to manage investment properties in China
