The business trust, which will be made up of gas and water utilities that were previously wholly-owned by Temasek, has also signed up Fidelity and Singapore-based investment firm Indus as cornerstone investors in a move that is expected to increase the attractiveness of the deal. The two cornerstones will buy a combined 13.5% of the offering at the IPO price, with Fidelity getting 9% and Indus taking 4.5%, the sources said.
CitySpring is looking to raise between S$241 million and S$286 million ($157 million to $186 million) from institutional and retail investors based on an indicative price range of S$0.75 to S$0.89. This sale will account for 71.5% of the 450 million units that will be sold in total. The remaining 28.5% will be bought by Temasek.
There is a greenshoe of 32.175 million shares, but this will come out of TemasekÆs initial share and wonÆt increase the total size of the trust. If the greenshoe is fully exercised, the investment company will see its stake fall to 21.4% and the maximum deal size could increase to $204 million.
The split between institutional and retail investors wonÆt be determined until February 5 when the price is due to be fixed, but investors expect about 8%-10% of the public portion will be sold to retail investor through an ATM offer and another 15%-20% through brokers.
Observers say the high yield and the Temasek name are attracting a lot of interest to the offering, while the inclusion of cornerstone investors is also ôa very strong positive signal for the market.ö
At the top end of the range, the yield is line with that offered by Macquarie International Infrastructure Fund, which is trading at a yield just above 8%. However, one observer says investors tend to look at this deal more in terms of the relative yield versus the risk free rate and viewed that way the offer certainly looks like it is worth a buy.
The 10-year Singapore bond yield currently trades at around 3% after falling from 3.6% in July, a decline which has made high dividend instruments like the CitySpring business trust and the similarly structured Reits relatively more attractive.
Meanwhile, the fact that CitySpring is a business trust (rather than a fund like MIIF), institutional unit holders wonÆt have to pay tax on the dividends, making it a nice offer relative to MIIF as well. Singapore-listed high-yield stocks also trade at a forward yield of about 6%. CitySpringÆs yield calculations are based on the estimated dividend payout for the first full fiscal year to March 2008.
CitySpring is expected to grow strongly through acquisitions in the early years, with the possibility of investing both into other utilities assets currently owned by Temasek û notably the power generating assets, which have been loosely been up for sale for quite some time û and into other utilities around the Asian region.
One syndicate research report argues that given TemasekÆs strengths in terms of its infrastructure assets and its experience in managing them, CitySpring may be able to grow in line with other trusts of a similar nature. These have expanded at an average of over 100% per year in their first two years.
Herein also lies one of the main risks for this company, however, should it fail to make rapid acquisitions amid intense competition for assets from both listed and private equity trusts.
Initially CitySpring will own 100% of City Gas Trust, which is the sole producer of town gas in Singapore û a monopoly that is likely to last until 2016, according to the earlier mentioned research report. Its second asset is a 70% stake in SingSpring Trust, which is the owner of SingaporeÆs only large-scale seawater desalination plant. The plant has a contract with the Public Utilities Board to supply water in return for a monthly fee which is partly fixed, partly variable. The agreement will provide SingSpring with a predictable cash flow until it runs out in 2025.
The remaining 30% of SingSpring is owned by Singapore-listed Hyflux, which is one of AsiaÆs leading water and fluid treatment companies.
The IPO will be jointly arranged by DBS and Morgan Stanley. The books will close on February 2 and the trading debut is scheduled for February 12.