Is Capitaland’s $11 Billion Acquisition of Ascendas-Singbridge a Good Deal?

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Capitaland Limited (Capitaland) announced itsintent to acquire Ascendas-Singbridge (ASB), owner of a portfolio of mainlyindustrial and logistic properties from Temasek Holdings, in a deal wortharound $11 billion enterprise value.

This is certainly a blockbuster deal, goingby the size of the transaction value, and by virtue that both Capitaland andASB are major real estate players locally. It is a major expansion byCapitaland, which the management stated that it will create the largestdiversified real estate group in Asia.

Is this a good deal for existing shareholdersof Capitaland, and how would it impact both Capitaland and REITs under the ASBumbrella in future (ASB is not listed)? We shall take a closer look in itsarticle.

PartiesInvolved

The deal involved three parties. Firstly,Capitaland is a household name in Singapore which is a major real estatedeveloper, operator and owner with assets in retail, office and hospitalitysectors.

ASB is a provider of sustainable urbandevelopment and business space solutions that is fully owned by TemasekHoldings and JTC Corporation. With $23.6 billion of Assets-under-Management(AUM), it is the sponsor of some well-known REITs such as Ascendas REIT andAscendas Hospitality Trust.

Temasek Holdings, one of two sovereignwealth funds of Singapore, is a major shareholder of both entities, with 40.8%stake in Capitaland and 100% in ASB.  

Summaryof The Acquisition

With Capitaland buying over the entire ASBfrom Temasek Holdings, it is taking on the full assets of ASB including itsdebts. In total, the full enterprise value is worth $10.9 billion, comprising about$6 billion of equity and $4.9 billion of liability and minority stakes.

Hence, theactual amount that Capitaland will pay Temasek is $6 billion via a mixture of

  • About$3 billion cash sourced from debt and other financing options
  • 862.3million Capitaland shares issued at $3.50, that is worth about $3 billion

As new sharesare being issued to Temasek, this essentially means that Temasek’s ownership inCapitaland will increase from 40.8% currently, to 51% post-acquisition. ASBwill then be a fully-owned subsidiary of Capitaland.

Source: Capitaland’s Acquisition Deal Presentation

Rationaleof The Acquisition

There are a few benefits as shared byCapitaland management.

Firstly, it enables Capitaland to expandinto real estate sectors that capture the growth of new economy mainly in thefuture megatrend of e-commerce and urbanisation. If we look closely,Capitaland’s suite of assets and REITs cover the retail, office, lodging andhospitality sector, but not the industrial and logistics sector that arebooming in tandem with rise of e-commerce. By acquiring ASB, it immediatelycompletes its sector coverage by adding a pool of established industrial andlogistic assets under its wings. This is probably the reason why they pickedASB too as it is most well-known for the largest industrial REIT locally –Ascendas REIT.

New real estate sectors added from ASB (in greendots). Source: Capitaland’s Acquisition Deal Presentation

The deal also enables Capitaland tostrengthen its presence in existing key market of Singapore and China, andenter new growth market mainly India. The group will see a 40% and 9% increasein Singapore and China AUM respectively, and establish its India presence to $3billion of AUM in one fell swoop.

Perhaps another angle to look at it is thatTemasek Holdings, as majority shareholder of both Capitaland and ASB, played arole in pushing for this deal that streamlined its ownership from two companieswith some overlapping operations, to one company with a larger stake.

FinancialImpact on Capitaland

Based on pro forma financial figures forCapitaland and ASB from last twelve months earnings, the proposed transactionwould increase Earnings per Share and Return on Equity by 4% and 5.7%, whilereducing the Net Asset Value to $4.31 per share. 

Source: Capitaland’s Acquisition Deal Presentation

It is worth noting that gearing ofCapitaland is expected to increase to 0.72 times of Net Debt to Equity. This isa substantial jump from 0.51 times.

Source: Capitaland’s Acquisition Deal Presentation

ThePositives

The most apparent benefit of this deal isthat Capitaland will be a much bigger real estate player as its total AUM willbe bumped up to $116.5 billion. This would place the combined entity in theleague of 10 largest real estate investment manager in the world. With a muchlarger scale, the operation landscape of Capitaland widens to the global stage,and it can compete for better assets, cheaper financing rates, and strongertalents effectively with other global giants. It is indeed a case of analready-formidable giant becoming a global behemoth.

Source: Capitaland’s Acquisition Deal Presentation

Up till now, Capitaland has its hands infull spectrum of real estate sector except for industrial/business parks andlogistic assets. With this acquisition, the picture is now complete as Capitalandexpands into new sectors that are better positioned to ride on the growth ofnew economy in e commerce and sustainable urbanisation, which are ASB’s forte.

TheNegatives

As with any mega acquisition deal, muchwork has to be done to integrate the acquired company to ensure thatoperations, systems, corporate practices and culture gels well enough todeliver the intended synergistic effect. It is very often a challenging projectand could take some time. Capitaland is aware of the mammoth task on hand andhas established an Integration Committee to drive integration plan goingforward. 

Of course, there is another issue ofwhether Capitaland overpaid for the acquisition and the ensuing gearingincrease. With the global economy picture not at its brightest prospect at themoment, and real estate value being closely linked to economic performance, itis surely an issue that warrants close monitoring.

Ultimately, if the integration of bothcompanies is executed successfully, then paying a high price would be, onhindsight, worthy. So, it all boils down to post-merger execution of businessstrategy.

Conclusion

The share price of Capitaland, its REITs andASB-linked REITs all showed positive movement immediately after the acquisitionis announced. Apparently, market seems to like the proposed deal and theincrease in share price shows some optimism on the fruition of future growthand benefits to all related companies.

The acquisition is not cast in stone yet asshareholders’ approval still need to be sought through an EGM.

Regardless, it pays to monitor Capitaland’sfuture corporate announcements closely and there will be some exciting timesahead.

CS Jacky

CS Jacky is a Remisier and Financial Adviser with Phillip Securities Pte Ltd. Graduated with a Bachelor in Business Administration (Finance), he has been investing in the stock market since 2010.He identifies companies with good prospect trading at a low valuation using a unique blend of fundamental, technical, and portfolio analysis. He also holds REITs and dividend paying shares.He holds regular seminar to share about market updates, investment insights of specific stocks in his watch list, and overall wealth management for retail investors.He is the owner-blogger of 'CS Jacky - 360 Wealth Management' and a guest writer for Value Invest Asia.

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