SPH shareholders have to decide between cash and REITs

Cuscaden’s latest offer to SPH shareholders, announced on Nov 15, is for either $2.36 per share in cash, or $2.40 comprising $1.60 in cash and 0.782 SPH REIT units. Keppel’s final offer as at Nov 9 is $2.351, comprising the REITs, with just $0.868 in cash, 0.782 SPH REIT units and 0.596 Keppel REIT units.

With Cuscaden’s either all-cash or higher-cash component offer, SPH acknowledges that the Cuscaden scheme is superior to the Keppel scheme. Subject to independent financial advier’s (IFA) opinion and in the absence of a superior competing offer, SPH independent directors preliminarily recommend to SPH shareholders to vote against the Keppel scheme at the scheme meeting in relation to the Keppel scheme; and vote in favour of the Cuscaden scheme at the Cuscaden scheme Meeting. Cuscaden is working expeditiously with SPH for the transaction to complete by February 2022, SPH has said.

Keppel’s offer saddles SPH shareholders with REITs

“Keppel’s Final Consideration provides a compelling offer, with the highest deal certainty and, if the transaction is approved, the fastest payout by mid-January 2022. SPH shareholders will continue to receive the same mix of Keppel REIT and SPH REIT units, with additional cash of 20 cents per share. I would add that SPH shareholders will be receiving Keppel REIT units at an attractive valuation of 10% discount to its net asset value [NAV] as of Sept 30, 2021,” Loh Chin Hua, group CEO of Keppel Corp, said during a briefing on Nov 10 when Keppel raised its offer for SPH with a larger cash component.

Even then, with Keppel’s better offer, SPH’s largely retail shareholders — it has some 60,000 — will be saddled with more REITs than cash at a time when interest rates have started to firm. In a recent conversation, Vishnu Varathan, chief economist at Mizuho Bank, comments: “interest rates will surely rise next year.” Indeed the US Federal Reserve has indicated that the Fed Funds Rate is likely to be raised by the end of the next year, and because of quantitative tightening, bond yields are rising already.

Rising bond yields usually cause REIT yields to rise as well, so that REIT yields can maintain their yield spread between their yield and risk-free rates. As a result, REITs’ unit prices could fall. Keppel said its scheme can be completed as early as January, just in time for Keppel REIT to be distributed to SPH’s 60,000 mainly retail shareholders at a time when REITs’ unit prices could possibly come under pressure.

Moreover, Keppel REIT has been trading at a relatively rich valuation compared to its mean, at around a 10% discount to its NAV — which in terms of its P/NAV ratio is the highest in three years (see Chart 1). Keppel REIT’s P/NAV is usually at a mean of around 0.84 times, and its current P/NAV is at a premium to its mean.

By the time Keppel REIT is distributed to SPH’s shareholders, the REIT could be pressured by its enlarged shareholder base of another 60,000 investors, and rising interest rates. Meanwhile, SPH already holds 66% of SPH REIT, and SPH shareholders already have the benefit of being indirect investors in SPH REIT.

During the Nov 10 briefing, Loh indicated that the SPH investment was beneficial to Keppel. “The way we have structured the transaction also allows us to implement the acquisition without overstraining our balance sheet. In our Final Consideration, we have maintained the same structure of offering a combination of Keppel REIT and SPH REIT units, with an increased cash component,” Loh said on Nov 10.

“The incremental cost arising from the revised offer would be approximately $323 million, which would be funded through a combination of cash and borrowings. Since we launched the asset monetisation programme in September 2020, Keppel has announced about $2.4 billion in asset monetisation and received about $1.6 billion of this in cash. We have further announced that we are on track to exceed the target of $5 billion by the end of 2023,” Loh elaborated.

“While this is an attractive acquisition and important transaction, Keppel will remain very disciplined and will not acquire SPH at any cost. Neither would we want to drag out this process for too long, which would not be in any party’s interest. We have therefore made it clear that this is the final consideration,” Loh continued.

Unfair to Keppel REIT investors?

When Keppel first launched its offer for SPH on Aug 2, Keppel REIT’s unit price fell (see Chart 2) underperforming the iEdge S-REIT Index till Cuscaden launched its offer on Oct 29. Keppel REIT then rebounded. It fell during Keppel’s counter-offer on Nov 9–10, and rose with Cuscaden’s offer on Nov 15. Perversely, Cuscaden’s offer has caused Keppel REIT to rise, thus lifting Keppel’s offer price as the latter is tied to the unit prices of both Keppel REIT and SPH REIT.

Cuscaden has a better offer

Christopher Lim, group executive director of HPL, speaking on behalf of Cuscaden Peak, says the consortium took into account SPH shareholders’ concerns and objectives in the consortium’s plans.

“We were thoughtful about what shareholders want, and we designed our revised proposal to give them an option for their own investment objectives. Again, in relation to future plans, there is potential for a good conversation with SPH’s management. That reflects our desire to bring all stakeholders along on the journey. And third, from an execution certainty perspective, we have been focused on putting our faith in the hands of SPH shareholders. We have always been thinking about SPH shareholders, in every component of how we designed our proposal,” Lim explains.

“Our offer is compelling because it gives each and every SPH shareholder the highest value and it carries a better offer price with a higher cash component whether all cash or part cash, and it includes an option for shareholders who wish to take part in the distribution-in-specie (DIS), especially of the SPH REIT units,” Lim says. Cuscaden’s initial proposal was just an all-cash offer.

Lim also points out that SPH’s independent directors acknowledge that the Cuscaden scheme is superior.

“Our scheme delivers transaction certainty, as the Cuscaden scheme only requires the approval of SPH shareholders. It is not enough for shareholders just to sit down and do nothing. They must vote against the Keppel scheme first,” Lim emphasises.

“The value of our scheme requires a bigger commitment from us because Keppel’s scheme involves a DIS of SPH REIT units and as a result the market cap of SPH is reduced. The Keppel scheme is not under the obligation to make a chain offer because SPH would be left with only a 20% stake in SPH REIT versus its original 66%,” Lim continues.

“When we started, the initial offer was a cash offer and SPH has 66% of the REIT. There is a requirement of a mandatory chain offer with [the ability] of funding it as well. We have also taken into account that $500 million of bonds need to be redeemed. The bondholders have the right to exercise a put option on the company, and $450 million of perpetual securities need to be called,” Lim says. All in, a full cash offer, bond redemption, calling the perps and the chain offer altogether is likely to cost Cuscaden around $6 billion.

“We have fully provided for all this — in total, $6 billion in cash — on the assumption the chain offer for SPH REIT is triggered,” Lim says.

Not all plain sailing

On Nov 21, Cuscaden announced that the Monetary Authority of Singapore and Info-Communications Media Development Authority have given their approvals to Cuscaden’s proposal. “The application to Australia’s foreign investment review board has been submitted and since its submission we have been in correspondence and all questions raised have been responded to by Cuscaden,” Lim says.

In Keppel’s Nov 9 announcement, it was revealed that in a supplemental letter, SPH and Keppel agreed that SPH will not take any action to hold an alternative scheme meeting within eight weeks from the date of the Keppel scheme meeting which is scheduled to be held on or around Dec 8. On Nov 24, SPH announced that the Keppel Scheme Meeting has been delayed.

Market observers have pointed out that these “handcuffs exploit an arbitrage in our regulations”. Timelines such as these are prohibited under the UK takeover code, but it is now being tested by Singapore, they say.

Ideally, both schemes should be offered to SPH shareholders on the same day, Cuscaden has indicated in its presentation and announcements. The Cuscaden scheme is at a slight disadvantage in that it would complete in February 2022 a month later than Keppel's. However, if SPH’s shareholders vote against Keppel’s scheme, the eight week waiting period falls away.

No surprise then, that Lim continues to emphasise that SPH shareholders have to attend and vote down Keppel’s scheme, if they want an all-cash offer, and a higher offer than Keppel’s. They then can vote on Cuscaden’s scheme.

The holders of SPH’s management shares — Great Eastern Holdings, Oversea-Chinese Banking Corp, NTUC Income Insurance Cooperative, Singapore Telecommunications, DBS Bank, United Overseas Bank, National University of Singapore, Fullerton, and Nanyang Technological University — hold around 16.3 million shares. After Dec, these will rank as ordinary shares and account for around 1% of SPH’s 1.59 billion shares in issue. Some 50% to 60% of SPH’s shareholdings are believed to be held in nominee accounts. In this case, shareholders must instruct their custodian banks or financial institutions on how they wish to vote.

Photo credit: The Edge Singapore