Temasek's offer to buy out SMRT Corporation for about S$1.2 billion ($884 million) and unlist Singapore's largest metro operator underlines the state investment fund's unique social role. But it also sets back efforts to expose the city's transport network to market forces.
In a joint statement published late Wednesday, majority shareholder Temasek said it wanted to acquire the remaining 46% stake it does not own in SMRT.
As well as operating three of Singapore’s five existing metro lines, SMRT runs some of the city’s light rail, bus, and taxi services.
Temasek said it wants to take SMRT private to free the train operator of the "short-term pressures of being a listed company" so it can focus more on delivering safe and reliable services. That's after a spate of disruptions tarnished the country's reputation for high-quality public transport links, including three in April alone.
However, one possible alternative agenda is to protect the train operator from public scrutiny since SMRT will no longer be required to disclose its operational details once it is a private company.
Aside from potentially reducing transparency, the proposed take-private also marks a reversal for broader efforts to make Singapore's public transport system more efficient by exposing it to market forces.
The move “appears to be a step away from the regulator’s policy to separate ‘nationalised’ public transport infrastructure from a more liberalised and ‘market-based’ environment for operators,” Daiwa analyst Jame Osman said in a note to clients.
But Temasek president Chia Song Hwee denied the country’s train system was being nationalised, stressing the state fund's core commercial aims.
“We are a long-term shareholder, a long-term investor. We do take sustainability of the business, the model, as being key consideration,” Chia said in a conference call late Wednesday.
Public transport reform
Much of the criticism stems from the fact that Temasek, through its subsidiary Belford Investments, is taking over SMRT at a time when the train operator faces increased operational risks and a foreseeable decline in profitability.
That follows government reforms to separate train ownership and operation.
As part of the regulatory transition, the Land Transport Authority (LTA) announced last week that it will purchase SMRT’s rail assets for S$991 million. After the estimated completion of the transition on October 1, SMRT will then operate on an asset-light basis and assume only the operational rights of the train business.
LTA said the new system, known as the New Rail Financing Framework, will enable more timely capacity expansion, asset replacement, and upgrades, as well as create a new maintenance performance standard to improve train reliability.
Under the new framework, SMRT’s exclusive earnings before interest and taxes will be capped at 5% of total revenue. Any incremental earnings above this have to be shared with the LTA.
SMRT will also face uncertainty over future fare adjustments and the impact on ridership of new railway lines, according to Temasek’s presentation.
And all this at a time when costs are going up.
“With rail reliability still undergoing improvements and upgrading, we expect [SMRT's] expenses to increase and erode earnings over the next few years,” OCBC analysts said in a Thursday note to clients. “This means that earnings will remain weak and core rail operations may even be in loss positions in the near to medium term.”
Analysts at Nomura, meanwhile, said SMRT could focus on improving the earnings of its taxi and bus operations but said the scope for doing this was limited.
Temasek is offering SMRT shareholders S$1.68 in cash for every share -- that's on top of the final dividend of S$0.025 that is due to be paid for the current financial year.
Altogether that values SMRT at about S$2.6 billion.
The offer price represents a 8.7% premium to SMRT’s last close of S$1.545 on Friday, and a 10.8% premium to the stock’s 12-month volume weighted average price, which is broadly in line with other similar mergers and acquisitions.
Yet, the price translates to 34.1 to 64.2 times earnings on a trailing 12-month basis, which represents a hefty premium of 52.3% to 186.6% to the average price-to-earnings ratio over the past 12 months.
The high P/E ratio is the result of earnings estimate downgrades following the shift to the New Railway Financing Framework.
The implied price-to-earnings for SMRT’s offer is a significant premium to other listed public transport operators in Asia. Japan’s Keisei Electric Railway, West Japan Railway, and Hong Kong’s MTR Corporation all trade at sub-20 times earnings on a forward basis.
Structure and timetable
Temasek is offering to take SMRT fully private through a scheme of arrangement, which means it is required to secure approvals from 75% of the shareholders that own the remaining 46% stake.
Desmond Kuek, SMRT’s president and Group CEO, said Temasek adopted the scheme of arrangement instead of a general offer to underline its determination to take over all of the company.
Under a general offer, shareholders are invited to tender their shares to the acquirer and a compulsory takeover occurs only when the acquirer reaches a 90% share holding, a much higher threshold.
By comparison, a scheme of arrangement is an 'all or nothing' event in which the buyer fully acquires the target should it get 75% of shareholder vote and receives all the necessary court approvals. It does not accumulate any shares if it fails to meet any of the pre-conditions.
Given SMRT’s fragmented shareholder base, it is unlikely that any particular shareholder could block the deal on its own. The top three SMRT shareholders apart from Temasek are JP Morgan Asset Management (1.98%), Vanguard (1.77%), and Allianz Asset Management (1.46%).
Under the tentative timetable, SMRT will hold a scheme meeting for shareholders by October with a target completion date in November at the latest.
It is worth noting that while SMRT will also seek shareholder approval for the asset sale to LTA, the two transactions are not conditional upon each other. That means Temasek will proceed with the buyout even if the asset sale is rejected, although that is considered a very unlikely scenario.
Credit Suisse is the sole financial advisor to Temasek while Bank of America Merrill Lynch is advising SMRT.