On 23rd Jan 2015, KepCorp announced its intention to buy out the remaining shares of Kepland with offer price at a base of $4.38/share to $4.60/share when the acquisition becomes compulsory. Presently, KepCorp owns 54.6% of Kepland as of 22nd Jan 2015 and with Kepland having a market cap of S$7.11b (based on share price of $4.60), KepCorp would have to pay S$3.23b for the remaining 45.4% of Kepland share. According to KepCorp, the funding for the acquisition is through a combination of internal cash resources and borrowings and the financial impact of would be immediately accretive to NAV, EPS and ROE.
The piece of news would represent the biggest M&A deal so far and lot of questions are being asked about the rationale behind the privatization and is it the correct move for KepCorp going forwards. Like any other thing, the acquisition will come with pros and cons and as a long-term investors on KepCorp, I would have to find out all those pros and cons and decide on whether the move is strategically a good one from the management.
Cons
1. According to KepCorp FY2014 earning it has a net cash of $5.74b, a net debt of $1.65b and a net gearing ratio of 0.11. After the acquisition, it will push up KepCorp net debt to $4.73b and a net gearing ratio of 0.41, that is almost increase of 4x.
2. The current supply glut of oil nobody will know when it will end and when oil price will rebound. While KepCorp has order book that stretched till 2019, a lack of orders or potentially cancel of orders could hit on its earning (in fact KepCorp has already been requested to delay 2 of its orders for delivery) and will need good net cash position to ride over the storm. The acquisition of Kepland will probably half of its net cash amount.
3. Property price in Singapore and China has been declining and nobody know when it will be the bottom or when the respective Government going to loosen its cooling measures. That uncertainty will weigh on Kepland at least in generating revenue. While waiting for the property cycle to turn, KepCorp after Kepland acquisition will have to burden its debt and that could potentially tide down any free cash for potential good M&A deals of its non-property related businesses.
4. According to KepCorp's presentation before acquisition the composition of its net profit is : offshore & marine 55%, infrastructure 17%, property 26% and investment 2%. After acquisition, the composition becomes : offshore & marine 48%, infrastructure 15%, property 35% and investment 2%. There is a drop of 2% from the so-called recession proof business of infrastructure and that shifted to the cyclical sector (property and offshore & marine). Should there be no positive turn in outlook in those 2 cyclical sectors, its net profit will be weighed down and concern will be generating positive cash flow in financing the 4x increased in debt.
Pros
1. After acquisition of Kepland, for its FY2014 earning, its net profit will have a change of +14%, EPS change of +13%, ROE change of +12% and NAV change of +4%. Those are the immediate financial impact which boost the value of KepCorp shareholders.
2. The acquisition of Kepland will allow its to have the flexibility to re-balance its net profit composition from the various businesses (offshore & marine, property, infrastructure and investment). That is should property sector has the ability to generate higher revenue and profit level, it could allocate more resources to leverage on it.
3. Should the acquisition to be successful, Kepland would be delisted and taken private and hence any investors wanting to invest in Kepland's share would have no choice but to invest in KepCorp and that could bring some positive outlook to KepCorp share price.
4. Acquisition of Kepland will allow KepCorp to be more diversified in its business and not like presently in which it is heavily relied on its offshore & marine business.
5. Property market has been on a decline for years due to cooling measures (both locally and in China) and with global economy facing deflation (result from having the cash but not willing to spend) that affecting growth, ease of cooling measures to stimulate spending (inflation) should be the way out and while the acquisition of Kepland might not be at the tough of the property cycle (not far from it) but the timing could be not much of a wrong either.
Assessing all the pros and cons, it is no surprisingly to find that most (if not all) of the cons are pretty much related to short and mid-term uncertainty in global economy. Looking at the bigger picture and from a long-term perspective, the pros could easily outweigh those cons and strategically the management looks like making the right move. As a long-term investors, my concern is only for the long-term and in the acquisition I do not see a derail of the fundamental and in fact should be improving on its fundamental with the deal. Hence, I do not see a need to divest out KepCorp because of the acquisition and in fact this brings the thought of me increasing my holding on any price weakness.
