Jan 2019 Edition *This Report was first published for our VIA Email Subscribers on 31st Jan 2019, a free newsletter service, to find out more, click here.
The Singapore stock market has been soft. The Singapore property market has been soft. The Singapore oil & gas sector has been soft. When growth is running out, something tends to happen in an industry; consolidation.
And it seems Singapore is about to see one of the largest consolidations ever happened in the property sector. CapitaLand Limited, the largest property developer in Southeast Asia, has announced it is proposing to acquire Ascendas-Singbridge Group, the property company directly owned by its main shareholder; Temasek.
The proposed mega-deal will cost CapitaLand about S$6.04 billion and the company will have to take on an additional S$4.87 billion worth of net debt and minority interest.
But! With this acquisition, CapitaLand claims it will become the largest diversified real estate group in Asia. So is it true? And what does this mega-deal really mean?
Here my thought on it:
CapitaLand is a diversified real estate company which counts three main business segment; property development, fund management and hospitality. The deal would increase the market capitalisation of CapitaLand by more than 20% based on the transaction share price and increase the net income of the company by about 25%.
Largest In Asia? Really?
However, the proclamation that it will create the largest diversified real estate group in Asia is quite misleading. For now, the combined group is still nowhere near the size of China’s mega property companies like China Vanke or Country Garden, which have market capitalisation of around S$50 to S$60 billion each. Nor does the new CapitaLand has an asset size of more than its Chinese peers.
In fact, CapitaLand would still have a lower market capitalisation and asset size compared to the Singapore-listed Hongkong Land after the acquisition. So where is the “largest diversified real estate group” coming from?
From reading the announcement and the presentation, it seems that CapitaLand is focusing on its fund management business, where after the merger, it will have an asset-under-management (AUM) of more than S$116 billion, making it one of the top 10 property fund managers in the world.
Source: CapitaLand Presentation – New AUM
So maybe this is the part management is talking about and not the actual size of the company. Nevertheless, this is the largest merger/deal we have seen in Singapore for many years. What will be the implication?
The Master of All REITs
After the acquisition, CapitaLand would add even more REITs into its stable of S-REITs. Ascendas is the sponsor of three more REITs listed on SGX, namely;
Ascendas India Trust
Ascendas Hospitality Trust
The three REITs would have a total AUM of S$13.8 billion and Ascendas-Singbridge controls another S$6.5 billion of assets through its other private funds and capital partnerships.
During the announcement and presentation, management keeps coining the term CapitaLand 3.0, indicating that it is a new chapter for CapitaLand and sort of playing to the technology trend of naming version of a software.
Management believed that the merger would help them achieve growth for the company and finding “synergy” during the integration. What does that mean?
Where Is The Industry At?
Behind all the sophisticated language and many fantastic terms such as synergy being used, we have to understand why is the deal happening in the first place? A typical business cycle involves:
Mature / Consolidation
A property market would most likely not be in a startup stage since it is a business that is as old as commerce itself. And it would not be in a growth stage because, during a growth stage, new competitors are coming into the market because they are seeing how profitable it has been for the early companies. It might be the case during the last decade as many construction companies all jump into the development industry, trying to grab some of that profit themselves.
Of course, business has seen slowing. CapitaLand itself has been struggling to find growth over the past few years. When there is no place to find organic growth, companies will turn to merger and acquisition. This is the stage we are most likely at.
Today, the property market has not been that profitable over the years, there might even be a huge risk of a decline going forward. If that happens, only the larger company has a fighting chance to survive. So the merger between CapitaLand and Ascendas-Singbridge might not be one that is proposed for the “synergy” but rather a question of survival.
I Am An Optimist
It might sound like I am negative on the acquisition. On the contrary, I actually think it is a wise move. If there is indeed a decline ahead, a larger CapitaLand would have a higher chance of surviving the crisis. And if there is a rebound in the market, a larger CapitaLand would also be in a better position to capitalise on it. So, no matter how the market is, it is better to stick together for the two company.
Yet, I have some reservation on how the deal is structured, especially on its valuation. From the presentation, Ascendas-Singbridge would improve the operating profit of the company by about S$300 million.
That means the deal is almost valued at 20x Ascendas-Singbridge’ earnings. The assets-under-management of Ascendas-Singbridge is around S$23billion while CapitaLand holds about S$93billion in management. This means that Ascendas is valued at about 25% of its AUM while CapitaLand is valued at just 16% of its AUM.
Given that CapitaLand is issuing a huge portion of shares to fund this acquisition, shouldn’t the price is set at a more comparable rate? Even if we use the asset value of the company, CapitaLand is issuing shares below its book value while although they did not disclose the information on the presentation, I highly doubt that they are acquiring Ascendas-Singbridge below 1.0x book value. Moreover, CapitaLand is the company with a significant additional business segment such as property development, shouldn’t CapitaLand be the more valuable asset of the two companies?
In most measures, Ascendas-Singbridge is helping increase CapitaLand’s earnings by about 25%. It would increase its AUM close to 25%, but why is CapitaLand paying more than 42% of its own value to buy 25% of growth?
Unless… Unless the management already has plans to extract more value from the company. Ah… The Synergy…
However, the last I checked, the main way to improve the profit margin of a company in a soft market is to cut cost! And what better cost to cut than manpower?
But this is all just one man’s speculation. Regardless of the outcome and the real reason behind the acquisition, the world has to move on.
Stanley Lim has spent the last decade in the investment industry. Over the course of his career, he has kick-started a few businesses, worked in the family office industry and most recently in the investment advisory industry. He has been a writer and analyst for The Motley Fool Singapore from 2013 to 2017. He has written close to 2000 articles online, on investment education and market analysis. He is the co-writer of the investment book: “Value Investing In Asia”, published in 2018. Stanley is currently the chief editor of Value Invest Asia.