UE offer: Yanlord and Perennial cut another curious deal

Singapore

PERENNIAL Real Estate Holdings has just sold all its shares in United Engineers (UE) to Yanlord Land for zero profit, at a price below market. This is not what companies usually do, unless cash is an issue or confidence has been lost in the investment.

The truth may be neither of those things, once you account for the 25.3 per cent gain that Perennial has made by flipping its shares in UE subsidiary WBL Corp over to Yanlord as part of the package.

The structure of the deal seems to suggest that the value of WBL has risen by 25.3 per cent while the value of UE has remained flat since mid-2017, when Yanlord and Perennial acquired control of UE from the OCBC group and its founding Lee family.

In reality, WBL seems to be priced rather richly, relative to UE.

WBL's net asset value has barely changed since Perennial bought in at S$2.07 apiece in 2017. As at end-2018, its net asset value (NAV) per share was S$2.5947. So if this is the price Yanlord said it paid, then WBL was priced at one times book value.

In contrast, Yanlord paid S$2.60 to Perennial for the UE shares, or 0.86 times UE's NAV per share of S$3.01 as at June 30.

This is close to the average of 0.9 times NAV that offerors have paid during successful privatisations of other Singapore-listed property developers like Keppel Land and Wheelock Properties, wrote DBS Bank, which advises Yanlord.

But DBS did not draw any comparisons with how WBL was valued. It did not note that UE is a profitable company that owns plum assets like freehold office towers in Anson Road and Alexandra Road, whereas China properties account for more than half of the WBL conglomerate's asset base.

WBL's losses in 2018 had widened as revenue from its held-for-sale properties in Shenyang and Chengdu declined.

Asked by The Business Times to explain how the values for the WBL and UE transactions were determined, a spokesman for Perennial said: "We are unable to disclose further details as the transaction was reviewed on an overall package basis."

Perennial's former equity and debt contributions and the repayment of a shareholder loan were also taken into account, it said, without delving into specifics.

What's also interesting is that Yanlord has decided to raise its exposure to WBL now. Just last year, both Yanlord and Perennial had tried to offload their shares in WBL to UE at S$2.07 a share.

The Business Times had questioned the fairness of the sale at the time. That exercise was eventually blocked by minority shareholders of UE, including Oxley Holdings, which felt it would not be in its interest to buy WBL at that price.

To Yanlord, it might not matter if it has to pay a premium for WBL now, so long as it gets more of UE at an attractive price.

But it matters to UE's minority shareholders.

The Takeover Code requires Yanlord to offer to buy out all other shareholders of UE at the same price it buys out Perennial.

For S$2.60 in cash per share, it is unlikely that enough UE shareholders will find the offer attractive enough to tender their shares. So the offer is really just a mandatory formality, which is convenient for Yanlord, as it has no intention to privatise UE.

As for Perennial, the divestment gives it S$202.7 million in fresh cash that will come in useful as it has S$1 billion in debt maturing next year, and another S$1 billion maturing in 2021.

OCBC credit analyst Wong Hong Wei noted that Perennial had only S$60.5 million in cash at the end of June, which is insufficient to cover its S$560 million worth of bonds coming due next year.

He said: "The divestment helps Perennial to pare down debt somewhat and alleviate near-term liquidity.

"That said, further concrete plans on divestments (like Perennial's 31 per cent stake in AXA Tower, acquired in 2015 for S$1.17 billion together with a consortium) will still be needed as there is still insufficient liquidity to cover the near-term debt coming due."

Meanwhile, Oxley and its executives continue to accumulate more shares in UE. Their combined stake has risen to 24.48 per cent after deputy chief executive Eric Low bought more shares last month.

Yanlord owns 35.27 per cent of UE.

Oxley does not have the debt headroom to launch a counter bid for UE, but now that Perennial chief executive Pua Seck Guan is slated to resign from the board of UE, it remains to be seen if Oxley can forge a new relationship with Yanlord.

Last year, Oxley made two appeals for a seat on the UE board. Both were rejected.

Oxley and the board of UE have had their differences ever since Oxley emerged as a substantial shareholder of UE in 2017 after the Yanlord Perennial consortium took control.

Mr Low said: "We are evaluating our options."

Amendment note: In the sentence 'Oxley and the board of UE have had their differences ever since Oxley emerged as a substantial shareholder of UE in 2017 after the Yanlord Perennial consortium took control', we have removed a specific reference to Perennial CEO and executive director Pua Seck Guan. We are sorry for any suggestion that Mr Pua was the main cause of the disagreement.