Singapore Power shortlists for IPO

The last of three expected privatizations from Singapore this year has reached the final selection stages.

The 10 banks which originally pitched to Singapore Power (SP) have been whittled down to six, although participants say that it is not immediately apparent whether there will be a further cut and then bake-offs, or whether the next stage will be to go straight to fees.

The six comprise Credit Suisse First Boston, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley Dean Witter and Salomon Smith Barney. Each has a strong calling card.

CSFB has done a lot of advisory work for the group, as has JP Morgan, which has a close relationship with the company and led its debut international bond issue last April. Morgan Stanley has also done advisory work, but since the bank already has mandates to privatize the Port Authority of Singapore (PSA Corp) and Media Corp of Singapore (MCS) this year, competitor banks will have argued that it should be overlooked this time in the interests of spreading the net wider.

Another favoured contender is Salomon Smith Barney, one of the strongest equity houses in Southeast Asia and particularly Singapore, where it has completed four of the six largest offerings to date. So too, Goldman is said to have been particularly aggressive in a bid to establish the same kind of footprint it has in North Asia further south.

"Everyone wants this deal, as it represents one of the few big transactions from this part of the world," one banker remarks. "The lengths some houses have gone to has been quite remarkable even by the absurd standards we've been seeing in highly competitive mandate situations. One bank, for example, bulked up its first pitch with 12 MDs that had been especially flown in from outside the region."

The deal is said likely to top the $1 billion mark, based on SP's total shareholders equity of about $5 billion and is thought likely to hit the market during the third quarter. Both estimates remain just that, however, given the restructuring work that needs to be undertaken in the interim period. Corporatized in 1995, SP has, like the rest of corporate Singapore, been working hard to make its balance sheet more capital efficient and improve its return on equity (ROE), partly through enhanced gearing levels.

At the time of its first $300 million bond issue in April last year, company officials reported that SP still only had a debt to capitalization ratio of 10.6%, a high EBITDA to interest coverage ratio of 19.1 times 1999 earnings and an ROE of 7.6%, well below the government's 10% to 11% targets for its former Statutory Boards.  

This April, the company will divest its higher risk domestic generation assets - PowerSenoko and PowerSeraya - back to Temasek, a move which analysts believe will stabilize the company's revenue profile. Having accounted for 55% of total assets as of March 1999 and 53% of net income, the remaining domestic transmission and distribution assets are expected to contribute about 70% of earnings going forwards.

The equity kicker that should help drive its privatization with investors, on the other hand, lays with the rapid expansion of SP's international portfolio (SPI) which turned into the black for the first time during 2000. The company has estimated that over the medium term, 15% of profits should be contributed by its international assets, up from 2% during the first half of 2000.

 PSA Corp sails into view

The privatization of PSA Corp, first scheduled for last autumn and still said to be operating on a fluid timetable, is now looking more likely to come during the second quarter under the lead management of Morgan Stanley, UBS Warburg and DBS.

As a result of the shedding of the company's low yielding property assets back to Temasek, credit agencies have reported that shareholders equity has been roughly halved to S$3.2 billion ($1.83 billion), making the likely IPO size about $500 million, subject to the exact amount the government opts to divest. A re-focusing on core assets has been welcomed by analysts and industry specialists since the company's largely greenfield sites only generated about 3% of operating profit and would suck up working capital going forwards

As a result of the restructuring, the company's gearing has been increased to just over 35% and its ROE improved above the 12.7% figure reported by company officials at the time of the company's first international bond issue in late July last year.

Some observers have argued that PSA will prove a difficult transaction to execute, particularly following the loss late last year of one of its largest customers Maersk Sealand, which contributed about 12% of profits. Maersk, regarded as the world's only vertically integrated shipping company, opted to take a 30% stake at a port at Tanjung Pelepas after being enticed by heavy subsidies from the Malaysian government, which uses high import tariffs to subsidize transshipment rates.

However, as one industry specialists explains: "Far from detracting from PSA Corp's business model, Maersk's move only serves to reinforce it. Although initially, the move was regarded as a bad omen for PSA, analysts are slowly coming round to a different view."

This is largely based on the fact that Maersk, which operates ports in addition to its shipping activities, adheres to a different strategy to the rest of the industry. "Basically, they don't want to be dependent on transshipment hubs like PSA, but want to control their destiny by developing their own dedicated terminals," one industry figure reports. "The fact is that no other shipping line has the critical mass to follow suit. Were other shippers to transfer to Malaysia, they know that they would not be able to leverage off Maersk, because it's too busy doing its own thing."

Where PSA stands in a league of its own is the efficiency and throughput of its transshipment infrastructure on which the world's shipping lines depend to keep costs down. "It costs $65,000 per day to run a ship and basically you want to get it in and out of a port as quickly as possible and with as full a load as possible," the commentator adds. "It might be great moving to another port with lower transshipment rates, but if you then have to wait three days for boxes to be loaded on and leave with a half empty ship, you quickly lose out."

PSA, which is keen to bracket itself among the world's top corporate credits, also likes to emphasize that it is not running a blue collar business, but a brain business that makes intensive use of technology. The results have been impressive. During 2000, the world's largest container transshipment hub saw volume grow 7.2% to a record 17.04 million TEU's (Twenty Foot Equivalent Units), with over 300 shipping lines making 230 weekly sailings to 740 different ports in 143 separate countries.

"World trade is growing faster than GDP because container growth is increasing faster than trade growth," one commentator concludes. "Transshipment growth is, in turn, rising faster than container growth and nowhere is transshipment growth faster than in Asia, where countries like China and India record transshipment levels of 20% against 80% in more developed countries."