SINGAPORE (April 8): CapitaLand has made a convincing case for why its proposed acquisition of the Ascendas-Singbridge group from Temasek Holdings is in its long-term interest. But it hasn’t demonstrated that its minority investors are being treated fairly in the transaction. Temasek quite obviously benefits at their expense.

CapitaLand has proposed to acquire Ascendas-Singbridge for almost $6.036 billion, to be satisfied by an equal proportion of cash and new shares priced at $3.50 each. The price tag for Ascendas-Singbridge was reached by valuing its stakes in its real estate investment trusts (REITs) at market prices, coming up with an agreed fair value for its funds management business, and considering the net asset value of its remaining businesses.

On the other hand, CapitaLand will be issuing new shares to Temasek at a price that is more than 20% below its net tangible assets (NTA) of $4.40 per share, as at end-2018. (In fact, the price at which it is issuing new shares is also now below its market price of $3.65, though it was more than 7% above its market price just before the deal was announced).

On a pro forma basis, the transaction would have resulted in CapitaLand’s FY2018 earnings per share coming in slightly higher, at 42.3 cents, instead of 42.1 cents. But its gearing at end-2018 would have been 0.72 times, instead of 0.56 times — a difference of nearly 29%. CapitaLand has said it plans to bring this gearing down to 0.64 times by the end of 2020, through the steady cash flow generation and some “asset recycling”. Meanwhile, the transaction will significantly dilute CapitaLand’s NTA, from $4.40 per share to $4.04 per share — a difference of more than 8%.

CapitaLand also provides a summary in a circular to shareholders of the relative size of the transaction, which further highlights how its minorities are disadvantaged compared with Temasek. The entities CapitaLand is acquiring generated earnings that were equivalent to 23.7% of its own earnings; yet, the aggregate consideration for these entities is 44.2% of CapitaLand’s market value (based on its share price on Jan 11). Temasek currently owns 40.7% of CapitaLand. After the transaction, it would have a deemed interest of 50.85% of the enlarged company.

To be sure, it often makes sense for a company to pay up for an acquisition that enhances its future growth. One element of Ascendas-Singbridge that could improve CapitaLand’s prospects is its strong presence in “new economy” sectors. “Sectors such as logistics and business parks are exposed to and benefit from new economy trends like e-commerce, urbanisation and growth of knowledge economies,” CapitaLand notes in a circular to shareholders. It adds that properties in the sectors of business parks, logistics and data centres represented 55% of Ascendas-Singbridge’s assets under management as at Dec 31.

CapitaLand has also talked a lot about the benefits of the increased heft the acquisition of Ascendas-Singbridge will bring. For instance, the enlarged group would have a broader footprint in promising markets such as India and Vietnam, and “immediate scale” in developed markets such as the US, Europe and Australia. “The Capita-Land group would also become one of the top 10 real estate investment managers globally, with [assets under management] of $123.4 billion. The enlarged group would have eight REITs, 23 private funds and multiple capital partnerships, all of which are long-term capital platforms for efficient capital recycling,” it points out.

CapitaLand’s circular to shareholders also provides assurance that the acquisition of Ascendas-Singbridge is being done on normal “commercial terms”. In particular, the independent financial adviser it engaged outlined the sum-of-the-parts (SOTP) valuation model applied to Ascendas-Singbridge. The IFA also provided comparisons of valuations garnered by other property groups in the public market and in acquisition deals.

Yet, none of this actually demonstrates that minority investors of CapitaLand are being treated fairly. The crux of the issue is that the vendor of Ascendas-Singbridge is also the dominant shareholder of Capita-Land. Is it fair to use an SOTP valuation model to value Ascendas-Singbridge but not CapitaLand? Would Temasek support such a dilutive transaction by CapitaLand if the vendor of the acquisition target were a separate party? In such a case, surely it would be in Temasek’s strategic interest to step in to buy the target asset first, and then inject it into CapitaLand.

Taking a larger perspective, why hasn’t CapitaLand independently pushed into the “new economy” sectors that it covets? With Temasek as its dominant shareholder, it is hard to believe that it lacks Ascendas-Singbridge’s capacity to attract the necessary talent and capital to succeed in that same field.

As a small-time investor, I would have liked to see the independent directors of CapitaLand make a case for its shares to be valued on the same SOTP basis as<br>Ascendas-Singbridge in this transaction. Alternatively, they could have pushed Temasek to accept a lower price for Ascendas-Singbridge, given the depressed valuations at which shares in CapitaLand are trading.

If neither of those options were possible, perhaps the independent directors could have pushed for the transaction to be tweaked a little to favour minority investors in a different way. One possibility could have been for the transaction to include the issue of some free warrants to minority investors, exercisable at $3.50 — the same price at which new shares will be issued to Temasek. Besides providing CapitaLand with some funds down the road, the warrants might also make the minorities feel they were riding along with Temasek.

None of this means that I’m expecting CapitaLand to face any difficulty getting sufficient support from minority investors for the transaction as it stands. The extraordinary general meeting will be held on April 12, right after CapitaLand’s annual general meeting. As I said at the beginning of this column, CapitaLand has made a convincing case that the acquisition of Ascendas-Singbridge will ultimately come good. And, I doubt many institutional investors will vote against it, even if they are being disadvantaged by the terms.

Yet, it could leave some investors more convinced than ever that they shouldn’t expect to be treated fairly in the market. Perhaps it’s just as well that they do not entertain such fantasies anyway.

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