DBS backs Keppel's buyout of property arm

DBS provides bilateral loan to Keppel Corp to fund its buyout of property arm Keppel Land for up to $2.6 billion.

DBS is providing a bilateral loan to conglomerate Keppel Corp to finance the acquisition of shares in its property arm Keppel Land that it does not already own for up to S$3.2 billion ($2.6 billion).

The proposed deal is the latest privatisation as the city state's developers are faced with growing headwinds.

The size of the loan has not been disclosed but, according to a source familiar with the matter, part of the offer will be funded by DBS and the rest by Keppel Corp's own internal cash. The Singaporean lender is also advising Keppel Corp on the buyout together with Credit Suisse.

Keppel Corp on Friday made a cash offer for all the remaining shares of its subsidiary Keppel Land that values the latter at up to S$7.1 billion. Keppel Corp already owns 54.6% of Keppel Land.

After years of large rises, Singapore's property market is poised to see declines this year. Similarly, there are expectations that property prices will also fall in China, where Keppel Land and other Singapore developers have exposure.

According to a source familiar with the matter, Keppel Corp is taking a long-term bet on property, which is an area it already knows well. "Keppel Corp wants to grow its revenue and has low net debt, which means it has capacity to take on debt on its balance sheet," said the source familiar with the matter.

Keppel Corp's move adds to recent privatisations last year, including CapitaLand's privatisation of CapitaMalls Asia and United Industrial Corp's privatisation of Singapore Land.

"This is a continuation of an ongoing theme. Most of the Singapore developers are trading at a discount to net asset value and the environment is not conducive for them," said one M&A banker away from the deal. "It is surprising that Keppel Corp has chosen to do this as their share price is off about 30% due to the fall in oil prices," he added.

Valuations for Singapore developers remain undemanding, which means there could be more privatisations ahead. According to a Jefferies research report on January 26, other candidates for privatisation could include Wing Tai Holdings, Ho Bee and Wheelock & Co, which are trading below book value and have concentrated shareholdings. The three developers are trading at price to book of 0.48 times, 0.62 times and 0.71 times, the report added.

Most Singapore property developers have also been injecting properties into their real estate investment trusts (Reits), and raising capital at that level, reducing the need to for developers to raise capital (and stay listed).

In addition, according to one analyst who declined to be named, developers with foreign shareholders are required to sell units of properties they develop within a certain amount of time or face penalties. This has put another constraint on listed Singapore developers which have foreign shareholders and made privatisation a more attractive route.

Keppel Corp adopted a two-tier offer price approach to privatise Keppel Land. It has made a base offer of S$4.38 for each Keppel Land share. If acceptances exceed the 90% threshold level, which would enable it to exercise its rights of compulsory acquisition, it will raise the offer price to S$4.60.

The S$4.60 share price values Keppel Land at a premium of 35% over the six-month volume weighted average price preceding the offer.

Shares of both companies rose on Monday. Keppel Corp shares rose by 1% to S$8.16 and Keppel Land shares rose by 24% to S$4.55, at the upper band of the offer price. Keppel Corp said on Friday that it does not intend to raise its offer.

Assuming full acceptance of the offer, Keppel Corp's earnings per share and net asset value per share for the financial year 2014 will increase by 13% and 4% respectively.

¬ Haymarket Media Limited. All rights reserved.

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