SINGAPORE (Sept 28): If Axiata rejects the pre-conditional voluntary general offer (VGO) by Keppel and SPH to acquire M1 at $2.06 per share, the deal still goes through as it takes another effective 18% from the market to gain 51%, say analysts.

Assuming Axiata, which has a 28% stake in M1, is the only shareholder to reject the offer, the the deal will still go through. It will result in Keppel and SPH jointly owning 72% of M1 via the offering company, Konnectivity.  In this case, the privatisation of Keppel T&T at $1.91 is highly likely to go through.

To recap, two separate transactions were announced yesterday. In the first transaction, together with SPH, Keppel announced a VGO for M1 at $2.06. In the second transaction, Keppel is taking Keppel Telecommunications & Transportation (KT&T) private at $1.91.

The offer prices represent a 26% and 40% premium of the last traded prices respectively.

The entire transaction is estimated to be completed in 1Q19, which includes getting approval from IMDA. The offer price implies an EV/EBITDA of 7.6x and P/E of 14.3x based on M1’s last 12 months’ earnings.

Analysts say Keppel Corp is buying a telco to gain control and digitally transform M1’s operations to create synergy with its business in data centre, connectivity, smart nations initiatives and urbanisation strategy.

"We trust that management has a game plan in mind and not merely buying a telco. Without transformation, M1 will remain a non-core investment," says CGS-CIMB analyst Lim Siew Khee in a Thursday report.

However, management thinks a successful digital transformation will make M1 a core business although details of the transformation were not shared and will take a few years to materialise.

Meanwhile, the KT&T scheme was proposed to simplify Keppel’s corporate structure and allow a more efficient allocation of resources and capital within the group. It would also allow Keppel to better support KT&T to grow its data centre and urban logistics businesses. An estimated $277 million is to be paid out to KT&T’s shareholders in 1Q19.

A 100% acquisition of M1 and KT&T will increase KEP’s net gearing from 0.4x in 1H18 to 0.6x in FY19F. Cash outlay for the M1 offer is estimated to be $1.28 billion assuming a 100% acquisition and $360 million for a 50% acquisition.

Assuming a 100% acquisition of M1, the deal will add a $39 million net profit or 4% to Keppel in FY19F, based on our M1’s FY19F profit of $113 million and 3% financing cost.

Keppel's share price may be under pressure until completion of the transactions in 1Q19.

"Maintain "add" with an unchanged target price of $8.82 based on RNAV," says Lim.

As at 11.13am, shares in Keppel are down 15 cents at $7.01.