Initial thoughts on the Capitaland – Ascendas-Singbridge acquisition

Singapore investors woke up today to some pretty blockbuster business news – Capitaland’s proposed acquisition of Ascendas-Singbridge (ASB) from Temasek Holdings to create Asia’s largest diversified real estate group.

While I am not a shareholder of Capitaland, curiosity got me reading the announcement circular and snooping around Ascendas-Singbridge’s site. Here’s some of my initial thoughts.

Announcement details can be found here.

Acquisition Rationale

Simply put, the deal is highly synergistic and beneficial to the overall business. Capitaland and ASB operate in similar businesses and geographies, with the only difference being the type of real estate they develop and manage.

Capitaland has a more residential, office and retail mall focus, while ASB has a more business space / industrial park and hospitality focus. The combined entity will cover almost the entire spectrum of conventional property listed on the SGX.

This in my opinion, is the best part of the deal.

Deal structure and known financial effects

The deal consideration is worth about S$6 billion, which will be 50% from cash funded from debt, 50% from equity. The equity component is satisfied by issuing 862,264,714 shares at $3.50 to Temasek Holdings.

The equity funding portion is the part that is concerning. Temasek Holdings’ effective holding in Capitaland increases to 51%, becoming the controlling shareholder in the process. At the same time, the other shareholders are diluted down.

This in itself, may not be a problem from a valuation standpoint if the combined entity’s per share Net tangible assets or Earnings per Share increases.

A quick check of the announcement document proves otherwise.

This doesn’t look good at all, with a small increase in EPS while a substantial drop in NTA. This is partly because the shares issued to Temasek were priced at a significant discount to Capitaland’s NTA ($3.50 < $4.20).

To be fair, we do not know the latest figures as these are 2017 figures. However, based on these figures, there has be substantial synergies in order for this acquisition to make commercial sense.

Cursory reading of ASB’s Annual report

Despite it technically being a private entity, I was pleasantly surprised that ASB publishes an annual report on its website here.

Nothing really jumped out at me from the financials other than being pretty well capitalised, with growing revenues and net profit. One peculiarity I noticed was the existence of a 10 year unsecured bond held by JTC.

My understanding of this bond was that back in 2015 when Ascendas merged with Singbridge, Ascendas had to issue a 10 year fixed rate bond to JTC as consideration for acquiring Singbridge. For some reason, this bond is being treated internally as quasi-equity instead of debt, resulting in the bifurcation of ratios shown in the table above.

This caught my eye mainly due to its uniqueness and the resulting debt to equity ratio of 254.3% if the JTC bond was treated as debt.

Haven’t been able to find much explanation of the nature of this bond beyond what I’ve written above. To be clear, this in itself may not be a deal breaker, just something for me to watch out for and read about later.

Final thoughts

Commercially, this acquisition is a no brainer to me. Unfortunately, if you look at some of the figures published in announcement, it doesn’t exactly feel like a good deal for existing shareholders.

I’ll be interested to see how Capitaland’s share price performs tomorrow once the trading halt is lifted, as it will inform me about investors’ views of the acquisition.

What do you think of this megamerger? Are there any other areas of consideration I should be looking at?

Happy Hunting,
KK

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