Healthy outlook for Singapore M&A activity

Look out! The takeover action and speculation of recent weeks on the SGX [SI.SGXL] are harbingers of bigger things to come in 2001.

StockHouse LogoAfter a significant delay (since the "unwinding of Singapore Inc." theme was first touted by brokers early this year), the market is likely to finally see a huge jump in merger and acquisition activity next year. Such are the lags between intention and implementation in the divestment processes.

The "tech takeover talk" of recent weeks is simply a reflection of inevitable global dynamics. Our listed electronic contract manufacturers such as Natsteel Electronics [SI.NASL] were up against the ruthless logic of the international marketplace – they have to get big or get out.

At some point in Natsteel Limited's [SI.NATS] deliberations over the fate of its 33% stake in Natsteel Electronics, the need for vastly more capital to develop the sort of scale capable of withstanding margin erosion in this highly competitive business must have emerged as an issue. And if I could hazard a guess, Natsteel's government and government-linked shareholders – Temasek and DBS Group [SI.DBSM] – would have decided that they could not or would not tolerate pumping in the sort of funds needed to stay ahead of the game.

Besides, that would have run against the long-term trend towards the Government's privatizing its enterprises – that is, for the State to reduce rather than increase its ownership of business.

Over coming months, a number of variations on the theme will emerge. For starters, there is the much-talked about Government's approximately S$76 billion ($43.49 billion) holdings in SGX-listed companies. That represents some 29% of the SGX main board's market capitalization.

And of course, the largest of the Government's stakes is in SingTel [SI.TELE] - where it seems the more pertinent question is not whether there will be divestment of the Government's 79% stake, but when, how much, to whom, at what price? Valued at nearly S$35 billion, this is nearly half the total value of the Government's holdings of listed equities in Singapore. This is the Big One.

The signals from the Government are pretty clear. The 40% foreign shareholding ceiling has been lifted. And Deputy Prime Minister Lee Hsien Loong had been reported saying: "Anybody can bid for SingTel." Opening up the Singapore economy means that "you must prepare to merge and be merged and acquire and perhaps even be acquired".

Indeed, BG Lee said of the lifting of foreign shareholder ceilings in SingTel and DBS: "The purpose of it was to signal that the game is in play, that if anyone wants to come we will talk about it." Apart from some in defense, there was hardly any Government-linked corporation (GLC) where the Government needed to maintain a majority stake, BG was reported saying.

Then there is the long awaited restructuring, streamlining, and unlocking of value in Government conglomerates. Natsteel's divestment of its stake in Natsteel Electronics, and confirmation of its interest in also divesting its 52% stake in Natsteel Broadway [SI.NATB] is encouraging. It suggests that the restructuring idea was simply delayed this year – and not tossed into the "too-hard" basket, as some were starting to suspect after an earlier, less attractive restructuring attempt by Natsteel was aborted.

Investors would do well to keep their eyes on laggard Keppel Corporation. 2001 could well be the year in which the much-talked about merger between Keppel Hitachi [SI.KEHI] and Keppel FELS [SI.KFEI] actually takes place. And beyond that, there is also the possibility of a subsequent (or concurrent?) merger with SembCorp Marine [SI.SCMN]. This would represent the final leg of the rationalization of Singapore's shipyards. And certainly, Keppel Corp [SI.KPLM] management would be aware of the weight of market expectations - not least on its ability to unlock the value of its shares (which are trading at a 35% discount to its RNAV), and its commitment to remake itself as something more than a mere holding company with some treasury operations.

In the case of DBS, the action is likely to involve dilution of the Government's stake through the issue of new shares to finance a major acquisition. There was some disappointment over the failure of merger talks with Westpac. But there is little doubt DBS is already back in the saddle looking for another strategic partner.

Which brings me to another area of deal making to look out for in the coming year - banks. Will they or won't they? Merge, or take on strategic partners, that is. Clearly, the market prefers the former, rather than the latter. There was plenty evidence of that in OUB's share price, which came off pretty sharply when the punters came to the conclusion that management might be more interested in preserving independence and a strategic tie-up with a foreign partner through the placement of a minority stake than in a merger.

But even if nothing happens on that front, the banks have been given (three years) notice to sell down their stakes in non-core businesses, and have been quietly going about the business of sorting out their thinking on divestment. That's not sexy stuff, but it will probably start yielding results and real action some time next year. Indeed, we may have already seen the takeover merchants hovering over the assets. And there is at least some S$2 billion in shares and properties to be divested in total.

Let's start with Wee Cho Yaw-controlled UIC, where Manila-based property tycoon John Gokongwei has parked his private vehicle Telegraph Development - with a stake under a shade under the mandatory general offer trigger point of 25%. Whatever he says, the market is unconvinced he's purely passive about this.

Then there is Quek Leng Chan of Malaysia's Hong Leong group. Quek's Singapore-listed First Capital Corporation [SI.FCAP] has popped up on the shareholders' register with around 8% of another bank-linked property stock - OUE. A long-term, passive investment? Possibly. But these calculations get a bit complicated by the fact that OUB has to sell its 49% stake in OUE down to 10% or less in three years, under the new regulations laid down earlier this year by the Monetary Authority of Singapore. And it becomes a lot more muddy when you consider that OUE in turn holds more than 9% of OUB.

And hey – that's Quek again in Fraser & Neave (F&N) [SI.FRNM], through Singapore-listed Brierley Investments Limited [SI.BRY]. BIL now holds around 10% of F&N. Another passive investment I suppose?

Lim Say Boon is a director of OCBC Investment Research Private Limited.

Copyright: StockHouse Media Corporation