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City Developments hits minority resistance in offer for hotel arm

The Edge Singapore
The Edge Singapore • 5 min read
City Developments hits minority resistance in offer for hotel arm
(Oct 30): It was clear almost as soon as City Developments unveiled plans to take Millennium & Copthorne Hotels private that it would face resistance. The big question now is whether to raise its offer price, or just walk away. Or, come up with a plan to
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(Oct 30): It was clear almost as soon as City Developments unveiled plans to take Millennium & Copthorne Hotels private that it would face resistance. The big question now is whether to raise its offer price, or just walk away. Or, come up with a plan to unlock value at M&C that benefits its minority investors.

On Oct 9, before the London market opened, CDL announced a possible offer for the remaining shares in M&C that it does not already own for 552.5 pence a share, consisting of a cash payment of 545 pence and a special dividend of 7.5 pence. The offer price is 21.4% more than M&C’s closing price before the announcement, and valued the whole company at £1.8 billion ($3.2 billion).

In a joint statement on Oct 9, M&C’s independent directors said they considered the deal to be fair and reasonable, and recommended that investors accept the offer. London-listed M&C operates hotel brands like the Millennium, Grand Millennium, Copthorne and Kingsgate. CDL currently owns 62.5% of the company.

Yet, shares in M&C immediately surged to a closing price of 560 pence on Oct 9, suggesting that the market was anticipating that minority investors of M&C would demand more than what CDL was proposing to offer. Indeed, it was not long before a handful of institutional investors began making their views known.

In a joint letter to M&C’s independent directors on Oct 17, fund managers International Value Advisers and MSD Partners pointed out that CDL’s offer was a 32.5% discount to M&C’s net asset value (NAV) of 820 pence a share. The letter called for a valuation of M&C’s properties to help minority investors better assess the offer from CDL. International Value Advisers holds a 7% stake in M&C, while MSD Partners holds 1.4%.

Then, on Oct 20, David Smith, who is Standard Life Aberdeen’s head of corporate governance in Asia-Pacific, told The Straits Times that M&C’s “extraordinarily high-quality portfolio in London and New York” is “tremendous” and “difficult to replicate”. He figures that an acceptable offer would be about 800 pence a share. Standard Life Aberdeen owns about 4.3% of M&C’s shares. Interestingly, the fund house also owns 7.9% of CDL.

In a joint statement on Oct 19, CDL and M&C’s independent directors defended the offer price, stating that M&C is valued by the market on an earnings basis. They added that M&C’s NAV is not a good reference point since CDL has given an undertaking not to sell or repurpose any of M&C’s hotels in New York or London. M&C’s independent directors also disclosed that they had rejected two earlier proposals by CDL.

In a way, that statement should really just raise more questions. For starters, just how miserly were the first two offers from CDL? More importantly, is CDL actually saying it will never agree to sell any of M&C’s hotels in New York or London at any price? Shouldn’t such a blanket statement worry minority investors of CDL?

For now, analysts and investors actually seem positive about the prospect of CDL managing to wrest M&C from the hands of its minority investors. Immediately after the announcement of its possible offer for M&C, CDL shares rose 1.3% to $11.75.

In an Oct 10 report, Maybank Kim Eng Research analyst Derrick Heng maintained a “buy” call on CDL, with an unchanged price target of $13.60. He says CDL has adequate balance sheet capacity to fund the buyout, given its cash of $3.3 billion and net gearing of 0.18 times.

Lim and Tan Securities also maintained a “buy” call, while expressing confidence that the takeover would stabilise CDL’s recurring income and balance its “more lumpy development profits”.

Similarly, OCBC Investment Research’s Eli Lee reiterated his “buy” call for an unchanged fair value of $12.90, and commented that the deal would be accretive for CDL.

DBS Group Research analysts Rachel Tan and Derek Tan estimate that CDL could unlock $2.03 a share in value over the medium term if the deal is successful. The deal could also provide assets for inclusion in CDL Hospitality Trusts, managed by M&C REIT Management, an indirect wholly-owned subsidiary of M&C.

For 1HFY2017 ended June 30, M&C reported a 40% y-o-y rise in earnings to £42 million, on a 16% y-o-y improvement in revenue to £485 million.

Kwek Leng Beng, chairman of M&C and executive chairman of CDL, said there was “continuing pressure” on earnings from operations in North Asia and New York.

While there was recovery in revenue from Singapore, revenue from the rest of Asia was down “in part as a result of geopolitical tensions affecting visitor arrivals in hotels in Taipei and Seoul, especially from China”.

CDL is required to make a formal offer by 5pm on Nov 6. The offer will be conditional on CDL’s securing more than 50% of the valid acceptances, excluding the shares already in its grasp. With the current revolt among minority shareholders, this threshold may be challenging to reach.

M&C closed at 585 pence on Oct 25.

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