SINGAPORE (June 10): RHB Research says CDL’s revised takeover offer to acquire the remaining 35% stake of its subsidiary Millennium & Copthorne hotels (M&C) is likely to gain approval from minority shareholders.
See: CityDev launches another takeover bid for Millennium & Copthorne Hotels with 685 pence per share offer
RHB says the move is a long-term positive that should help CDL better reposition its ageing hotel assets and also result in a significant increase in its near-term capex.
“We make no changes to our estimates, pending further updates,” says RHB analyst Leng Seng Choon, who has a “neutral” with an unchanged target price of $9.20, 8% upside and 2% yield.
Under the revised takeover for M&C, the minority shareholders will receive 685 pence per share in cash, a 37% premium to the closing price from June 6.
The final offer values the entire M&C at GBP 2.2 billion ($3.9 billion), an implied FY18 P/B of 0.82x or 12.4x EV/EBITDA.
This is a second takeover offer for M&C since in October 2017, CDL made an offer of 552.5 pence/share which it later revised to 620 pence/share.
The offer lapsed on Jan 2018 as CDL failed by a small margin to get the minimum acceptance of more than 50% of M&C's shares that it did not already own.
“We believe the latest offer is likely to gain a minority acceptance as it’s a 10.4% premium to the previous offer and comes at a time when market conditions have worsened considerably amid heightened trade war concerns and Brexit uncertainty,” says Leng.
CDL currently owns a 64.2% majority stake.
CDL has also received irrevocable undertakings from the minority shareholders representing 43.6% of shares it currently does not own, thus it needs only 6.5% more in acceptance, to clear the 50% hurdle.
Additionally, M&C’s independent directors, who have been advised by Credit Suisse, intend to recommend unanimously that M&C shareholders accept the final offer.
The maximum cash consideration for CDL based on the revised offer is GBP776 million ($1.34 billion), which will be funded by a combination of cash and debt.
Net gearing after completion of transaction and recent acquisition in China is likely to be at 0.5x, up from 0.36x as at 1Q19.
Leong says CDL has been quite active in the acquisition front since 2018 and he believes after M&C’s successful acquisition completion, management’s focus will be on repositioning and extracting more value from its existing assets through AEI.
Overall, the above transaction is slightly dilutive at about 1% to CDL’s pro forma FY18 EPS but offers a slight 1% accretion to its NAV.
“Assuming successful completion, it will lift our RNAV estimates by 3-4% as we are currently valuing M&C at 550 pence per share,” says Leong.
In a separate research note, DBS Equity Research lead analyst Rachel Tan says CityDev’s offer presents an opportunity for shareholders to exit at a five-year high closing price of 500 pence.
In terms of operating performance, 2018 has been a challenging year for M&C with the group reporting a 29% drop in net profit to GBP106 million on the back of a 1.1% dip in revenues to GBP997 million which came mainly on the back of tougher global operational conditions coupled with impairments.
“We also note that significant capital expenditure has been planned for selected hotels within M&C’s portfolio and is currently underway which might mean more near-term pressure on earnings in the near term before we see a turnaround,” says Tan.
As for CDL, the potential privatisation of M&C will empower it with greater operational flexibility to re-position or re-develop the portfolio of hotels to improve the operating efficiency of its hotels by leveraging on the overall bigger group network.
And while the group intends to maintain M&C’s hotel network, some of the potential strategies could be to reposition selected hotels within the portfolio to realise value through recycling capital to its REIT, CDL Hospitality Trusts.
“The offer price of 685 pence represents an 18% discount to M&C’s last reported NAV of 823 pence (as of 1QFY19), which in our view is attractive for CDL given that most of the assets are hotels held at cost,” says Tan.
As at 10.42am, shares in CityDev are up 5 cents at $8.97.
