Keppel Corp moves to take KepLand private

Singapore

KEPPEL Corp on Friday put paid to rife market speculation by launching an offer to take its subsidiary Keppel Land private. INFOGRAPHIC: Taking back the land

But while the acquisition target was Keppel Land, much of the market scrutiny fell on Keppel Corp as analysts and investors asked questions about the bid.

Keppel Corp, which owns 54.6 per cent of Keppel Land, is using a two-tier price approach in its bid for the remaining shares it does not own.

The base offer price is S$4.38, valuing Keppel Land at S$6.8 billion. This is a premium of 25 per cent over the one-month volume weighted average price of the shares.

If acceptance levels exceed the 90 per cent threshold, turning the offer into a compulsory acquisition, the offer price would be raised to S$4.60 per share - a 31 per cent premium over the one-month value weighted average price - and valuing the real estate company at S$7.1 billion.

This, said Keppel Corp CEO Loh Chin Hua at a media and analyst briefing, was the premium that the conglomerate was willing to pay to take the real estate group private. Keppel Corp will not be revising the offer price.

"We have offered what we believe to be a fair and compelling price," said Mr Loh.

Keppel Corp will have the right to receive any distribution that may be declared, paid or made by Keppel Land on or after the purchase date. As an illustration, assuming that the settlement date falls after the books closure date for a S$0.14 dividend per share that has been proposed, the offer price received by the accepting shareholder will then be $4.24 and S$4.46 based on the base offer price and the higher offer price respectively.

Keppel Corp, which could pay as much as S$3.2 billion for the shares it does not own, will fund this through a combination of internal cash and borrowings. If successful, the move lifts the group's net gearing level from 0.11 to 0.41, a level that Keppel Corp says it is comfortable with, with room for more acquisitions.

By bringing in Keppel Land more deeply within the fold, the group would be able to allocate capital more efficiently, giving the group better risk-adjusted returns.

There will also be synergies between the group's core businesses that could be better achieved without compliance and regulatory hurdles, including the development of townships such as Tianjin Eco-city and data centres, said Mr Loh. Acknowledging that there remains more headwinds in the property market, Mr Loh said that the deal was not predicated on a quick recovery.

"We're doing this because we believe in the long-term fundamentals of the property industry, particularly in Asia, where Keppel Land is most exposed to. We believe that the urbanisation trend will continue. There will be more people moving to cities."

A privatisation will raise Keppel Corp's full-year 2014 pro-forma earnings per share by 13 per cent, from S$1.04 to S$1.18.

The immediate market reaction was that the move was positive for Keppel Land shareholders, but not so clear for Keppel Corp shareholders.

Analysts covering Keppel Land noted that the offer is priced above their own target prices over a one-year horizon.

UOB Kay Hian analyst Vikrant Pandey, who has a target price of S$4.30 for the counter, said: "Property developers have been trading at a very deep discount to RNAV (revised net asset value).

"We believe that's one reason why the parent is looking at potential privatisation. I think it's a fair offer to be given at this stage, though some long- term investors might want to hold for a higher price because it's still below the book value."

DMG & Partners Research analyst Ong Kian Lin agreed that the offer price, above his target price of S$4.05, is "quite reasonable in this current market". From Keppel Land shareholders' point of view, synergy doesn't matter, as they're just looking for a smooth exit, he added.

For Keppel Corp, however, analysts and investors seemed mostly unconvinced about the motivation behind the acquisition.

"Generally, investors are still not clear as to the exact reason on the privatisation because they already have a majority stake," said an analyst. "It's really up to Keppel Corp to show what else they can do to derive additional value."

Many saw the move as a defensive one to diversify the group's earnings at a time when the outlook for its offshore and marine division - which accounts for 55 per cent of its bottom line - is uncertain.

"It's about capital allocation, increasing exposure to property when the offshore business is a bit volatile," said Jefferies analyst Abhijit Attavar.

A flood of jackup and deepwater rigs that will enter the market over the next two years is exacerbating an already pressured market, as oil companies shave capital expenditure and put projects on hold.

With a "significant number" yet to be chartered, the situation is "unsettling", Mr Loh said when giving his outlook for the sector, even as he reiterated that the group has a strong order book stretching into 2019.

"While we believe that the current oil price will eventually recover to a level that would make economical most of the offshore oil fields that our rigs operate in, there is still some uncertainty how quickly the new equilibrium will be reached."

The decision to pump money into property, rather than into the offshore and marine sector where assets can now be picked up on the cheap, worried analysts, who wondered if it signalled a more bearish outlook for the sector than the company had let on.

"If today everyone is just so afraid of expanding into that particular segment, and they'd rather put the money somewhere else, it speaks of what they expect the outlook for the offshore side," said one analyst.

Asked why the group was not investing in the offshore and marine business, where the return on equity was higher than the property division, Mr Loh said: "This is the fallacy of allocation of capital. When a business is doing well and generating good return on equity like Keppel Offshore & Marine, it doesn't mean that you do even better by sinking more capital into it . . . It's a cyclical business. You can destroy value by investing more."

Questions were also raised over what seemed to be a dilution of Keppel Corp's exposure to the rig-building business, the reason why many investors bought into the stock in the first place.

Asked whether the investor base could now be diluted, Mr Loh said that Keppel Corp had been a conglomerate with a multi-business approach over the past few decades. "We have executed this strategy very well, we believe that this is one of the core tenets for Keppel . . . This transaction, if nothing else, (emphasises) that we believe in this approach that has served us so well."

Noting that the top 20 per cent of conglomerates in the world trade at a premium to their net asset values, Mr Loh expressed an ambition for Keppel to be the same.

In the short term, however, analysts warned that the impact could be just the opposite.

"From a stock perspective, conglomerates typically trade at a discount when they have more than one business . . . that's the key concern for the company now," said another analyst.

In the longer term, analysts posit that Keppel Corp could consolidate Keppel Land with its direct holdings of Harbourfront, Keppel Bay and its 65 per stake in Tianjin Eco-city, and relist the combined entity.

"Ultimately, if they can do it with some synergistic effect as a consolidated company, the valuations would be higher. It does make sense for them to relist it again if it becomes a more powerful entity," said an analyst.

Keppel Corp and Keppel Land last traded at S$8.10 and S$3.65 respectively. The trading halt for both counters will be lifted on Monday morning.

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