SINGAPORE (Jan 21): On Jan 14, CapitaLand announced it had entered into a transaction with Temasek to acquire its subsidiary Ascendas-Singbridge (ASB). The proposed transaction is valued at $10.9 billion, of which the equity value is $6.036 billion. The transaction has to be approved by CapitaLand’s independent shareholders at an extraordinary general meeting (EGM) expected to be convened in 1H2019.
The CapitaLand-ASB merger will be Singapore’s largest merger and acquisition ever, beating the $10.2 billion United Overseas Bank merger with Overseas Union Bank in 2001.
Of the $6.036 billion paid to Temasek, $3 billion will be in the form of 862.26 million new CapitaLand shares issued at $3.50 each, or 22% below its net asset value (NAV) of $4.49 a share (as at Sept 30). Temasek will also receive $3 billion in cash, for which CapitaLand will take on debt. CapitaLand will also assume around $4.5 billion of ASB’s debt.
ASB’s assets are: the investment properties acquired at cost, the book value of development property and the market value of its three listed real estate investment trusts (REITs). CapitaLand will pay 15 times the net income of ASB’s fund management segment, which includes goodwill of about $800 million (see Table 1).
Among the resolutions during the EGM will be a whitewash resolution. Temasek’s stake in CapitaLand would rise to 51%, from 40.8% currently, and Temasek will not be making an offer for the shares it does not own. In addition, CapitaLand will not be making a chain offer for ASB’s REITs — Ascendas REIT, Ascendas India Trust (a-iTrust) and Ascendas Hospitality Trust.
With ASB, CapitaLand will morph into Asia’s largest diversified real estate group, and ascend into the league of the top 10 property fund managers globally (see table in sidebar). It will have a presence in 180 cities in 32 countries, including the two Asian giants — India and China — and gain a new asset class in industrial and logistic properties.
“[First, the deal] adds interesting asset classes, especially in the new economy sectors driven by technology and ecommerce in areas relating to logistics, business parks and data centres,” says Lee Chee Koon, CapitaLand CEO, during an impromptu briefing held on Jan 14. Second, ASB will provide CapitaLand with a broader geographical footprint, which includes India.
In India, ASB’s model is similar to that of CapitaLand’s: investing in land and property; value-adding through development, designing and refurbishment; and monetisation through recycling into a REIT or fund, or divesting to a third party.
Third, while ASB provides CapitaLand with diversification away from China, it also adds new businesses in its core markets of Singapore and China in the form of new assets classes such as business parks and logistics.
“Fourth, and most importantly, [this merger] creates the largest fund manager in Asia, with $116 billion in assets under management [AUM]. On a global scale, we will rank in the top 10. The range of asset classes and markets will enable CapitaLand to compete on a global scale and brings tremendous promise to CapitaLand,” Lee says emphatically.
Investors ponder on valuation, upside
Although CapitaLand’s share base is likely to expand 20.7% as the number of shares rises to 5,025.1 million, dividends are likely to be unchanged. “The whole deal is constructed such that we are not expecting any shareholder to cough up capital, and the company does not expect any change to the dividend policy, meaning that the dividends that shareholders receive will not be affected by this transaction,” Lee says.
Dilution to minority shareholders is obvious, though. CapitaLand is issuing 20.7% more shares at a 22% discount to NAV, but paying 1 times book for ASB’s physical assets, market price for REITs and absorbing goodwill.
On the face of it, Temasek is the real winner, as it receives undervalued CapitaLand shares and cash. On the other hand, investors can buy CapitaLand shares at $3.30 (as at Jan 16), which is 20 cents lower than the shares to be issued to Temasek.
In return, and based on simple arithmetic, shareholders will get immediate return-on-equity and earnings-per-share accretion (see Table 2A). ROE rises to 8.88% from 8.4%, and earnings per share rises 4%. CapitaLand’s gearing (net debt-to-equity ratio) will rise to 0.72 times, from 0.51 times. This will inevitably raise CapitaLand’s weighted average cost of capital. CEO Lee says, however, that the company will still be able to support its development activity, and coupled with “disciplined recycling, that will help drive our returns above our cost of equity”. In an update, Morgan Stanley is expecting an ROE of 10%.
On a pro forma basis, the combined CapitaLand-ASB entity is likely to report a profit after tax and minority interest of $2 billion, up from CapitaLand’s $1.55 billion (for FY2017). Investors who are likely to weigh their dilution versus future growth may be attracted by the latter, especially if they are likely to continue receiving 12 cents in dividend per share (as at FY2017) during the growth phase. The 29% pro forma growth in Patmi is higher than the 22% dilution in NAV. Moreover, pro forma Patmi does not take into account the synergies that should lead to even higher growth.
Synergy and growth
In a news release, CapitaLand says AUM will grow 40% in Singapore and 9% in China. The value of the group’s properties in Singapore will be worth $38.6 billion, or 33% of combined AUM. The combined group will own 51 million sq ft of investment property and six million sq ft of development property. In China, the larger CapitaLand group will own 86 million sq ft of investment property and 63 million sq ft of development property comprising AUM of $48 billion, or 41% of total AUM.
CapitaLand will be organised a little differently to optimise capital allocation and returns. The business units are likely to be Singapore and International as one unit; China; lodging in the form of The Ascott; logistics and business parks; and asset management. The platform in each unit will be largely developer, owner and operator and, eventually, the assets could be recycled into REITs, business trusts and discretionary funds under the asset management division.
First-mover advantage
Both Lee and chief financial officer Andrew Lim made mention of India during the Jan 14 briefing. “This transaction gives us scale in India, which brings with it a lot of promise and excitement, and sectors that ASB is in — such as logistics and business parks — are doing very well,” Lee says.
Lim reiterated this point. “ASB brings a new exciting, growth market — India — which we’ve had trouble unlocking before despite some strong attempts. ASB is a first mover [in India]. They also have the advantage of having a full-chain business that starts from development all the way down to ASB’s listed fund a-iTrust. So, they have the ability to recycle capital, all the way to monetising mature assets.”
Although ASB and a-iTrust are known for their IT park development and operations, a-iTrust has diversified into logistics warehouses. It acquired a portfolio of six operating warehouses with net leasable area of 832,249 sq ft in the Arshiya Free Trade Warehousing Zone in Panvel, near Mumbai. The acquisition, completed last February, provides a-iTrust with the right to extend construction funding and purchase sites for future development in the FTWZ, subject to fulfilment of the vendor’s terms and conditions. The estimated development potential is 2.8 million sq ft. Key clients in the operating warehouses include DHL and Huawei. The FTWZ is close to Jawaharlal Nehru Port, one of India’s key ports.
Last May, a-iTrust announced it had entered into a forward purchase agreement to acquire two buildings with a combined built-up area of 1.4 million sq ft in AURUM IT Special Economic Zone in the AURUM IT Park, also in greater Mumbai. The SEZ consists of four IT buildings with a total built-up area of 2.9 million sq ft. a-iTrust has the right of first refusal on the remaining two buildings, which have a combined built-up area of about 1.5 million sq ft. In addition to the properties near Mumbai, a-iTrust owns seven IT parks spread across Bangalore, Hyderabad, Pune and Chennai.
a-iTrust’s distributions per unit for FY2018 ended March stood at 6.8 cents, up 7.9% y-o-y. For 1HFY2019, a-iTrust announced DPU of four cents.
Last June, Temasek and ASB announced they had jointly committed INR20 billion ($400 million) to invest in logistics and industrial real estate in key locations in India. Separately, ASB and SembCorp announced they would jointly master develop Amaravati Capital City Start-up Area in Andhra Pradesh with Amaravati Development Corp, an agency of the Andhra Pradesh government. This month, ASB announced the acquisition of a 12.2-acre land parcel in Chennai to be developed into an IT park.
ASB has AUM of $2.6 billion in India, including a-iTrust’s AUM of about $2 billion.
Deleveraging plan
CFO Lim, cognisant of concerns over higher gearing, laid out clear deleveraging plans. He had earlier articulated that the run rate for net debt-to-equity was 0.64 times, although CapitaLand’s gearing has generally fluctuated between 0.4 and 0.55 times. “In the short term, [the plan is] to take CapitaLand back down to 0.64 times by December 2020,” Lim says. This can be done without issuing new shares.
First, CapitaLand can recycle assets and ASB also has a recycling plan. Last year, CapitaLand divested more than $4 billion worth of properties. Clearly, it will have to divest $3 billion by end-2020 to get 0.64 times gearing. “Our target remains to [deleverage] by $3 billion annually,” Lim says. ASB had plans to list a portfolio of suburban campuses in the US into an office REIT with AUM of around $1 billion. So, together, the merged entity could divest $4 billion worth of properties by end-2020.
The second way to lower gearing (debt-to-equity) is to raise the equity portion through retained earnings. “Combined with ASB, we have $2 billion of Patmi. If we pay out $600 million of sustainable dividends, we have $1.2 billion to $1.4 billion of Patmi that will grow the equity base and give us the ability to manage our debt-to-equity,” Lim says.
In the meantime, CapitaLand can continue to grow AUM and fee income through its funds. “We have a number of securitisable platforms, [such as] property funds with undrawn capital, that will allow us to tap new capital in the next 18 to 24 months. Combining these three buttons we can push, we are quite confident we can get back down to 0.64 times by 2020,” Lim adds.
After EGM, time for REIT watch
After the EGM and integration, action and attention could turn to the REITs. The merged entity will be sponsor to eight REITs and 23 private funds. “In terms of the fund management business, it will increase our fee income by 40% (to $337 million). And the range of assets will give us the possibility to create new funds, form new REITs and drive earnings and ROE for the company,” Lee says.
Interestingly, Credit Suisse is expecting a faster pace of asset recycling, following Lim’s articulation of a $3 billion annual deleveraging figure, implying more action at the REIT level. “CapitaLand’s expanded stable of eight listed REITs could see a higher frequency of acquisitions, including overseas. However, we believe it would be critical for the REITs to achieve a meaningful scale to be an effective offtake vehicle. As such, we expect a greater urgency to undertake a consolidation exercise within CapitaLand’s listed REITs, particularly in the case of Ascott Residence Trust and Ascendas Hospitality Trust, given the overlapping exposure,” Credit Suisse says.
Deutsche Bank says: “We could see an increased level of inorganic growth for REITs such as Ascendas REIT and CapitaLand Commercial Trust as asset pipelines expand and the sponsor’s willingness to divest assets increases.”
Most analysts have reiterated their “buy” or “accumulation” recommendations, following the Jan 14 announcement. Credit Suisse has retained its “neutral” recommendation. “The market could impute a higher discount rate on valuations, given the added complexity of an enlarged CapitaLand,” the Swiss bank says. It reckons the stock is fairly valued at the valuation of 0.73 times price-to-book.
All in, this is just the first chapter for the new-look CapitaLand, soon to be much bigger than the local developers, with REITs much larger than the other S-REITs and a fund management arm among the ranks of the top 10 global fund managers. No surprise, then, that CapitaLand’s management has articulated a wish to capitalise on the network effect that its size, asset and geographic diversity enable.
“As in all major transactions, the success of the transaction will be about integration so that we can unlock the synergy and values underlying the portfolio and be ready to drive good returns on a sustainable basis. We are quite confident,” Lee says.
CapitaLand-ASB deal unlikely to shake up local industry, say experts
By Jeffrey Tan
The proposed deal between CapitaLand and Ascendas-Singbridge (ASB), which is set to make the former a much larger real estate player, has certainly caught the attention of the industry. But market observers say the merger, if it goes through, should not have a major impact on other locally listed and non-listed property developers and real estate fund managers.
For one, it does not change the ranking status quo. “CapitaLand is already the largest player in Singapore to begin with. So, I don’t think it will significantly change the dynamics of the game at home. We do not believe it will affect UOL Group and City Developments (CDL) too significantly,” OCBC Investment Research analyst Andy Wong tells The Edge Singapore.
With the acquisition of ASB, CapitaLand is poised to grow its assets under management to more than $116 billion, 25% more than its AUM of $92.8 billion as at Sept 30, 2018.
Morgan Stanley analyst Wilson Ng estimates CapitaLand will extend its lead as the biggest real estate investment trust (REIT) manager in Singapore, managing one-third of the sector by market capitalisation. At present, it manages about 20%. “The addition of [ASB] could perhaps generate cross-selling opportunities with regard to leasing commercial spaces for rent, giving a slight incremental edge than before, relative to peers CDL and UOL,” he tells The Edge Singapore. “Otherwise, changes to the competitive environment in the Singapore residential and commercial businesses appear marginal at best.”
In terms of global ranking, however, CapitaLand is set to break into the ranks of the top 10 largest real estate investment managers, based on the IPE Real Estate Top 100 Investment Management Survey 2018. The company will leapfrog its global rivals — such as JPMorgan Asset Management and Allianz Real Estate — to ninth place, from 14th now.
Also, while CapitaLand and its large local peers have expanded overseas and pursued diversification across many segments of the property industry, their focus differs from each other despite overlaps. “They compete in a different arena compared with CDL and UOL, especially on their overseas ventures,” says CGS-CIMB.
This should not bring CapitaLand into direct competition with its peers. OCBC’s Wong says the company aims to expand further in India and into new sectors such as logistics and business parks. “These are the areas and geographies in which UOL and CDL do not have a focus,” he says. “They could look into these countries or sectors in the future, but not now. [It is the] same for the other smaller developers.”
Post-merger, CapitaLand’s assets will include logistics and business parks, integrated developments, shopping malls, lodging, offices, homes, REITs and funds. These are largely located in its core markets of China and Singapore. Meanwhile, it will continue to expand in markets such as Vietnam and Indonesia. The company will also have a sizeable market in India through ASB and Ascendas India Trust.
On the other hand, UOL’s portfolio is made up of development and investment properties, hotels and serviced suites in Asia, Oceania and North America. Through its hotel subsidiary Pan Pacific Hotels Group, UOL runs two brands: Pan Pacific and PARKROYAL. The company’s Singapore-listed property subsidiary, United Industrial Corp, owns an extensive portfolio of prime commercial assets and hotels in Singapore.
CDL’s portfolio comprises residences, offices, hotels, serviced apartments, integrated developments and shopping malls. These properties are located mainly in China, the UK, Japan and Australia, apart from Singapore. The company’s London-listed subsidiary, Millennium & Copthorne Hotels, is one of the world’s largest hotel chains, with more than 135 hotels worldwide, many in key gateway cities.
The question now is whether the CapitaLand-ASB deal may spark a consolidation in the real estate industry. John Lim, group CEO of ARA Asset Management, says scale is key to the real estate fund management business. “The transaction is testament to the fact that it is important to scale up and go global to compete with the big players. This deal will probably pave the way for more scale-driven mergers and acquisitions and we can expect more mega-sized funds, as well as rising fund exposures to new asset classes and geographies,” he tells The Edge Singapore.
OCBC’s Wong warns, however, that M&A in the industry are not easy to put together. Not all deals can rely on a powerful controlling shareholder such as Temasek, as in CapitaLand and ASB’s case, he says.
Things are more complicated at family-controlled developers, says an analyst, who declined to be named. Founders are less likely to give up control of their successful business, which they built from scratch, he says. “For a consolidation to happen — which will lead to a loss of control — it is a big question mark,” he says. “But, of course, if they can find any complementary business to acquire, that is possible.”
Still, the conditions must be right. Wong says low trading liquidity and cheap valuations may encourage more consolidation. A strong balance sheet, especially with low net gearing levels, will be an added incentive. “If [the interested buyer] already has a controlling stake, then it may be easier for [the party] to take over the company,” he says.
