Temasek, the investment arm of the government of Singapore, has retained JP Morgan to find a buyer for its wholly owned subsidiary CPG Corporation. The mandate is the first such divestment mandate awarded since Temasek released its Temasek Charter over the summer.
In the Charter it clearly stated that those companies to which Temasek can no longer add any economic value would be divested. Today's announcement (Thursday) shows that it is sticking to its charter.
CPG Corporation is the corporatized entity formally known as the Public Works Department (PWD) of Singapore. It is a rather unique company in that it is involved in architecture, civil engineering, property and facilities management, IT services and other consulting work. It does not do contracting.
In 1999 the PWD was corporatized and then in 2002 renamed CPG Corp. Since 1999 the company has followed the government's instruction for Singapore government linked companies to go regional.
CPG Corp now has offices in China, the Philippines, India and the Middle East and employs 2000 staff. According to figures the company filed with the Register of Companies in Singapore, CPG Corporation made profits after tax in 2001 of S$25 million ($13.88 million).
The challenge for JP Morgan will be to find a buyer that would want such a unique company. Regional infrastructure companies such as New world Infrastructure or Cheung Kong Infrastructure are more on the bricks and mortar side of the infrastructure business rather than clicks and mortar board side of the consulting business. Jardine has some experience in both fields and could be a potential buyer as could international engineering firms such as Ove Arup.
Another avenue JPMorgan could look down is to the private equity field. However, it is clear that part of the reason for selling the company will be to enhance its regional expansion plans and financial buyers might be less relevant on that front than a strategic buyer.
Key to the valuation of the company will be its sources of revenues. When it was corporatized in 1999, the government signed a five-year master agreement known as the moratorium under which a certain number of government projects in the health, education and other areas were funnelled to the company. That moratorium expires in March 2004, although CPG Corp will still enjoy the long lead times of the projects which it has been awarded since 1999 and then.
The margins that CPG gets from its work under the master agreement are known to be higher than those the government pays in the open market and so the challenge for any buyer will be to grow profits while the revenue base is transformed from 100% government guaranteed to more regional and commercial sources.
This deal is the second such 100% divestment that Temasek has entrusted to JP Morgan. In 2001 the bank acted as sole financial adviser on the sale of SEMAC, a waste distribution company to Sembcorp Industries. Temasek have indicated that they would like to complete the sale of CPG Corp by March or April 2003.
