SINGAPORE (Nov 4): On Oct 25, Yanlord Land Group announced that it had acquired the 51% in Yanlord-Perennial Investment (Singapore) that it did not own and renamed the company Yanlord Investment (Singapore). Of this 51%, 45% belonged to Perennial Real Estate Holdings, and 6% to Heng Yue Holdings. In the process, Yanlord took over the stakes of United Engineers owned by PREH and Heng Yue, raising Yanlord’s stakes in UE and WBL Corp to 35.27% and 29.9% respectively. (WBL is owned by UE.)
At a price of $2.60 per UE share and $2.5947 per WBL share, Yanlord paid $202.68 million to Perennial and $27.02 million to Heng Yue.
Yanlord’s increased stake in UE has triggered a conditional general offer for the 412.7 million shares in UE it does not own. Hence, Yanlord is offering the shareholders of UE $2.60 apiece for their shares.
According to Yanlord’s announcement, the acquisitions are in line with the company’s objective of consolidating its interest in UE and WBL in order to increase the company’s access to the property portfolios of UE and WBL in Singapore and China. Yanlord says the portfolios are complementary to its existing property portfolios and will enable the company to deepen its presence in these two markets.
An increased indirect ownership interest in UE will also allow Yanlord to allocate capital and exercise greater control over UE, thereby “enhancing the ability of the company and UE to leverage the benefits of each other’s track records, market positions, business strategies and institutional knowledge to create shareholder value”.
Unattractive pricing
The “mandatory conditional cash” offer price of $2.60 per share for UE is marginally below its closing price of $2.62 on Oct 25, before the offer was announced. “It is also at a 16.7% discount to UE’s NAV [net asset value] per share (as at June 30), implying a takeover offer at 0.83 times price-to-book. As such, we believe the acceptance rate for this general offer would be low,” OCBC Investment Research says in an update on Yanlord.
This cash offer is conditional upon Yanlord’s garnering valid acceptances that will result in its holding more than 50% of the total voting rights attributable to the UE ordinary shares. In any case, Yanlord said it had no intention to delist or privatise UE.
Possible chain offer for WBL
If the mandatory conditional offer for UE goes unconditional, that is, if Yanlord receives more than 50% of acceptances, Yanlord has to make a chain offer for the 70% of shares in WBL it does not own. Since Yanlord paid $2.5947 per WBL share, it would have to pay a further $510.4 million for the remaining stake in WBL.
Oxley Holdings, its chairman and CEO Ching Chiat Kwong and deputy CEO Eric Low collectively own more than 22% of UE. Ching and Low declined to comment on whether they would accept the offer. If they decide to accept the offer, Yanlord would have to make a chain offer for WBL.
As it is, Yanlord would have to come up with more than $1 billion to pay for the shares in UE it does not own should the offer go unconditional.
Yanlord’s ratings on review for downgrade
The exact amount of shares in UE that Yanlord can acquire will remain uncertain until the completion of the deal.
Moody’s Investors Service has placed on review for downgrade the Ba2 corporate family rating (CFR) of Yanlord. In addition, Moody’s has placed on review for downgrade the Ba3 rating on backed senior unsecured bonds issued by Yanlord Land (HK) Co, a wholly-owned subsidiary of Yanlord, and guaranteed by Yanlord.
“The review for downgrade reflects our concerns that Yanlord’s credit metrics could significantly weaken following its proposed acquisition of UE,” says Cedric Lai, a Moody’s vice-president and senior analyst. Moody’s estimates that Yanlord’s debt leverage — as measured by revenue/adjusted debt — would materially weaken over the next 12 to 18 months if Yanlord substantially increases its stake in UE via the general offer — given that the acquisition would be substantially debt-funded and Yanlord would assume all or substantial parts of UE’s liabilities.
As at June 30, Yanlord’s gearing ratio stood at 65.2%. If Oxley and company decide to accept the offer, taking Yanlord’s stake in UE to almost 58%, Yanlord would need to pay $310.7 million for Oxley’s stake in UE and $510 million for the stake in WBL it does not own. Zhong Sheng Jian, Yanlord’s executive chairman, owned a 70.11% stake in Yanlord as at March 13.
Undercurrents of minority revolt
How minority shareholders decide is very likely to depend on Oxley’s decision. If Oxley decides to accept Yanlord’s offer, minority shareholders may follow suit, given their dissatisfaction with the Yanlord-Perennial consortium. This is because the consortium is perceived as not endeavouring to enhance the value of UE’s property portfolio and provide better shareholders’ returns for them.
In 2018, minority shareholders voted with Oxley in an extraordinary general meeting against acquiring WBL. In 2014, UE privatised WBL after a tussle for control with Straits Trading Co despite UE’s owning less than 90%, the trigger point for compulsory acquisition. When Oversea-Chinese Banking Corp divested UE to the Yanlord-Perennial consortium in 2017, the latter had to make an offer for WBL, and acquired 28.12 million shares at $2.07 each.
In February 2018, after the Yanlord-Perennial consortium had gained control of UE, the latter held an extraordinary general meeting to obtain permission from shareholders to acquire the 19.9% stake in WBL, or 55.96 million shares, UE did not already own, at $2.07 a share. As the resolution involved an interested party transaction, the Yanlord-Perennial consortium could not vote. The resolution was not passed, as an overwhelming 67.44% of shareholders present or voting by proxy opposed it.
Market watchers reckon that if Oxley sells its UE shares, Yanlord may be in a position — albeit unwanted — to take UE private, which was not its intention, according to its Oct 25 announcement. Taking UE private — including the WBL chain offer — would amount to an outlay of $1.57 billion.
Yanlord’s interest cover was quite healthy at 6.5 times in 1HFY2019. But, if it has to fund the UE-WBL acquisition with debt, its gearing ratio will rise to as high as 80%. For 1HFY2019, Yanlord’s net profit fell 48% y-o-y to RMB1.18 billion ($227.9 million).
UE reported a net profit of $16.1 million in 1H2019, down 20% y-o-y. If this trend is repeated in 2H2019, UE would be on track to reporting its lowest net profit since the global financial crisis. UE is attractive because it has prized assets, including freehold land and buildings. Among the buildings that investors believe to have upside potential are its 83% stake in 999-year leasehold UE BizHub City (formerly UE Square), the freehold UE BizHub Tower on 79 Anson Road and the freehold UE BizHub West on Alexandra Road.
WBL is not listed. It reported poor earnings in FY2018, with a net loss of $9.8 million. Free cash flow was negative, at $36.4 million, and shareholders’ funds (less non-controlling interests) stood at $715 million, down from FY2017. The price that Yanlord paid PREH and Heng Yue for their WBL stakes, and based on WBL’s $715 million shareholders’ funds, translates into a marginal premium to NAV.
If Oxley decides to accept the offer for UE, minority shareholders will follow it out of the door and Yanlord could end up paying a premium for WBL.
