Will minority owners of M&C bite?

SINGAPORE property tycoon Kwek Leng Beng has finally put to rest years of market speculation over whether City Developments (CDL), the majority owner of Millennium & Copthorne (M&C), will seek to privatise the London-listed hotel chain.

On Monday, CDL - the Singapore-listed flagship of Mr Kwek's Hong Leong Group - said it planned to buy the remaining 34.8 per cent stake in M&C for £624.3 million (S$1.1 billion), valuing the hotel group at £1.8 billion.

Minority shareholders of M&C will get 552.5 pence in cash for each share. This will be made up of 545 pence in cash, and a special dividend of 7.5 pence per share when the offer becomes wholly unconditional.

News of the informal offer pushed the share price of M&C to more than a two-year high at 575 pence each. As for CDL, the share price has climbed steadily from S$11.75 per share to around S$12.20, a level last seen in January 2013.

From CDL's perspective, it makes perfect sense for the group to try and fully consolidate its hotel subsidiary. After all, it intimately understands its expansive portfolio and the hotel industry rattled by terrorism scares, overcapacity and political uncertainty in Europe.

If successful, the move will provide CDL more direct control and influence over M&C's operations, without the onerous obligations expected of a listed entity in London.

Income source

It will also provide a recurring income base for CDL. M&C accounts for almost half of CDL's revenue in the first half of 2017, one analyst said. The planned purchase is a positive development for CDL which will almost certainly be accretive, Eli Lee, a senior analyst at OCBC Investment Research said.

For the second quarter ended June 30, 2017, M&C generated a net profit of £39 million, up from £24 million a year ago as revenue grew to £262 million from £226 million. In constant currency, the group revenue per available room (RevPAR) - a key hotel metric - increased by 5 per cent to £86.64, from £82.52 a year ago. Occupancy improved marginally to 75.4 per cent, from 72.3 per cent.

At an enterprise value of 12 times its Ebitda (earnings before interest, taxes, depreciation and amortisation), M&C is trading at an attractive level compared to global hospitality plays which are trading at an average enterprise value over Ebitda of 14 times, noted DBS analyst Rachel Tan.

CDL could potentially unlock value in the asset-rich company in the future. M&C's properties could provide a potential pipeline to inject into CDL Hospitality Trusts.

But whether minority shareholders of M&C will bite remains to be seen.

M&C's independent directors, who have been advised by Credit Suisse, have said they considered the financial terms of the proposed offer to be "fair and reasonable". But others have noted that at 552.5 pence a share, the planned offer is at a substantial discount to M&C's net asset value (NAV) per share of 821.59 pence at the end of 2016. The Financial Times reported that analysts at Berenberg gave M&C a real estate valuation of £10.71 per share, but no analyst has ever set a price target higher than 525 pence because with CDL owning a major stake of 65.2 per cent, it operates more like a private company and won't sell its hotels.

In line with this argument, one observer in London also argued that M&C should not be valued based on NAV, since the hotel group does not trade in properties. He said if Mr Kwek had wanted to profit from the exercise, he would have considered an asset-light/capital-light hotel operator model, rather than committing to keep M&C's business model, and not sell or repurpose any of its hotels in London or in New York.

At the end of the day, minority shareholders need to decide whether the money parked in illiquid M&C shares will get them better yield elsewhere. Since M&C was listed at 295 pence per share in 1996, it has traded in a range of 400 to 600 pence following the financial crisis in 2009, and often at low volumes compared with the wider market.

While there is a significant amount of value in M&C's property portfolio, London analysts said the brand was not strong enough to compete with the likes of Marriott International, Starwood or Hilton. So its intrinsic value is hardly reflected in the stock market valuation.

CDL's 65.2 per cent control also meant M&C was unlikely to become a takeover target of a larger hotel chain.

Fair offer

London observers added that while there was a lack of precedents in terms of similar deals in the hotel sector, the premium offered is in line with those paid by majority owners of London-listed companies such as Arla Foods and Matalan when they were looking to buy out minority shareholders.

Taking these into consideration, the proposed 552.5 pence per share offer at a 21 per cent premium to the M&C share price last Friday could indeed be fair and reasonable.