Keppel Corporation’s Offer for SPH’s Non-Media and Property Businesses

What is this about?

Keppel Corporation has made a $3.4 billion offer to buy out Singapore Press Holding’s non-media business.

If this deal is approved by shareholders, it will give Keppel access to SPH’s real estate footprint, which includes malls, residential properties, a portfolio of purpose-built student accommodation as well as nursing homes. As Keppel said, SPH provides a quality portfolio of businesses and assets which are aligned with and complement three out of Keppel’s four focus areas and hence, represents a “unique opportunity” for the company.

How is this being done?

Keppel is offering SPH shareholders cash of 66.8 cent, plus 0.596 Keppel REIT units and 0.782 SPH REIT units for every SPH shares they own. Based on last Friday’s closing prices, the value of Keppel Reits on offer is 71.5 cent, and SPH Reits is 71.6 cents.

So, the total value of all of this is $2.099 per share.

In short, for every 1000 SPH shares owned, the shareholder gets $668 in cash, $715 worth of Keppel Reits and $716 worth of SPH Reits.

The offer is a 5 per cent premium to SPH’s 52 week high, 112 per cent to its 52-week low late last year, and a 29.5 per cent premium to the volume weighted average share price over the last 6 months.

However, all this is based on prices on July 30, 2021. However, the price of the Reits have fallen somewhat since the announcement on Monday. Will Keppel raise its offer price?

Why is this being done?

This is part of a plan to demerge SPH’s struggling media business from its more profitable property business. Ironically, the property business owes its formation and existence to the profits accrued from the media business during the better years.

The arrival of the digital era has been brutal to SPH’s media, primarily print.

Today, the print media is in structural and secular decline, and remains a loss-making albatross hanging around SPH’s neck. Although print ad revenues is still SPH’s biggest source of ad revenue, it is heading southwards, and there is no light at the end of this dismal tunnel.

Digital ad revenues - though rapidly rising - are unable to make up for the losses.

What next?

Shareholders will have to vote on the demerger and a subsequent spin off of the newly formed independent media trust at an Extraordinary General Meeting in end-August or early September. At least 50 per cent of participating shareholders will have to vote for the demerger.

Then by November, SPH shareholders will again vote on the Scheme of Arrangement at an EGM to allow the privatisation and purchase of the remainder of SPH by Keppel. Attendant shareholder vote has to be at least 75 per cent for the deal to go through.

What should SPH shareholders do?

Many investors bought SPH at much higher prices than it is today and much higher than the offer price. Should they vote for this deal?

Yes. The offer is the best “complete offer” received by SPH. Many of the other 20 or so offers were “cherry picks” with offerors wanting to take the best assets but leaving behind the debt and less desirable ones.

Given that the Reits values have slipped, there is a chance that Keppel could revise the offer to maintain its S$2.099 offer price.

There is also a chance that a new party - perhaps a global private equity outfit - coming in to make a higher offer for SPH’s property business.

If that happens, the appointed independent financial advisors will have to make an informed appraisal if that new offer is of higher value and more beneficial to all shareholders of SPH.

Meanwhile, SPH shareholders should vote for the demerger and a subsequent spin off of the newly formed independent media trust in August/September, then wait for any potential new developments up to November.

It is best to offload the loss-making media business and move on.

Unless the print media does a rapid turnaround, the days of $3.00 or $4.00 price levels for SPH are well and truly over.

But here's the thing.

While SPH's stock has been declining, the company has nevertheless paid out generous dividends.

So, if anyone has held SPH since 2015, he or she would have collected almost 85 cents of dividend to date. Add that to the $2.099 offer and shareholders are actually walking away with almost $2.95 per SPH share.

Shareholders will also get to continue collecting dividends - averaging 5 to 6 per cent - on SPH Reits and Keppel Reits. And they will also collect a potentially generous SPH dividend for this year ending August 2021.

Conclusion

This is by no means a perfect solution. But it is the best solution under the current circumstances. It gives long suffering shareholders an opportunity to unlock and maximise value. Painful as it may be to some, shareholders should vote for it.

They should take the cash and REITS units and move on.

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