On the buses

The logic behind Singapore''s latest piece of M&A is overwhelming.

In a meeting with the CFO of Hong Kong's subway Clement Kwok a few weeks ago, the MTR spent a good deal of time complaining about how passengers were being lost to rival bus companies. Kwok must wish he was in Singapore, where the attitude of MTR’s equivalent, the SMRT, seems to be that if you can’t beat the bus companies, then buy one.

“This is the most significant transaction ever done in the Singapore transportation landscape and has created a leading multi-modal transport operator,” says Philip Lee, managing director and head of Singapore investment banking for JPMorgan.

He is referring to the announced takeover of TIBS by SMRT. JPMorgan advised the bus and taxi operator TIBS which SMRT has announced it wishes to buy – in a deal valued at S$194 million. SMRT was advised by Goldman Sachs.

At one level, the deal show the divergence of views between Hong Kong and Singapore’s governments on transport policy. While Hong Kong is keen to see competition between the subway system and the buses, Singapore wishes to see competition between two integrated transport companies.

Thus SMRT TIBS will have about 1.9 million passenger rides per day, and will face off against rival Delgro, which has over 2 million per day. The latter is also building a light railway project in the outlying parts of Singapore.

Both companies will thus combine rail and road, offering each as feeders into the other. This will create a controlled sense of competition.

Compare this with Hong Kong where, in 1996, the mantra of competition led to the deregulation of Hong Kong’s buses. This has created a bizarre situation where environmentally-friendly MTR trains are losing passengers to the bus companies. The latter have been laying on an increasing number of vehicles, paying little regard to the fact that they are, therefore, less full; and even scanter regard for the environmental fallout in such a crowded metropolis. Some think that the worsening of air pollution in Hong Kong can be directly correlated with the deregulation of the buses.

Thus, if the Singaporeans are dealing with the air pollution issue more effectively, then this merger is part of that process.

However, for SMRT this has strategic importance too. A new sought-after light railway is to be built along the Marina, and the three bidders were SMRT, Delgro and TIBS.

By buying TIBS, SMRT has eliminated one of the bidders, and need only face off Delgro which is at a disadvantage because it is currently financing and building its own light railway project. The winner will be decided in August and SMRT now looks the favourite – especially since its market capitalization is now over three times that of Delgro’s.

Should it win, SMRT will be able to finance the project via either debt or equity. On the debt side – thanks to generous zero interest loans from the government – it has an interest coverage ratio of 16 times, making it amply able to add some leverage.

On the equity side – thanks to its majority ownership by the Singapore government – it also has options. The government has stated that it wants to reduce its stake in SMRT. It could do this via a new equity offering that further dilutes its stake and the funds raised could then be used as the equity component for the Marina light rail project.

With the acquisition of TIBS making such business and environmental sense, it is not surprising that SMRT’s share price rose on the news of the deal. That puts it in almost unique territory, given that whenever DBS or SingTel have announced acquisitions, the market has normally greeted the news with a falling stock price.

The deal was done purely for cash, and some would argue the biggest winner of all was TIBS major shareholder, Ng Sermiang, who owns 40% of the bus company. He will receive S$80 million from the deal and can take satisfaction that his company was sold on an attractive p/e ratio of 18 times versus comparables such as Kowloon Motor Bus (11.9 times) and Stagecoach (13.6 times).

Indeed, according to one banker, there were more private bankers at the press conference than journalists.

One thing is beyond doubt. Ng is now so rich he’ll never have to take a bus (or the SMRT) ever again.