News analysis

Temasek's $1.18b buyout offer for SMRT: A positive move with a puzzling twist

Infineon, Veolia, Linktone, Konami and various other companies that have sought to delist from various bourses in recent times cited substantial cost savings as a primary reason for doing so.

Yet, when asked what savings SMRT would achieve if it was taken off the stock exchange, the company said it had not thought about it.

Instead, the rail operator and its main shareholder, Temasek Holdings, focused on why the offer price of $1.68 a share was fair, how SMRT would continue to face huge business uncertainties, and noted that shareholders might not have another chance like this to cash out.

If a casual investor was in the room, he would have come away with an overwhelming impression that the joint briefing was designed to talk down the valuation of SMRT.

On paper, the offer price by Temasek for the 46 per cent of SMRT shares it does not own represents a 15 per cent premium over its 52-week average price.

 
 
 

But if one were to look at a longer timeline, a different picture emerges. Over the last 10 years, SMRT's price averaged $1.64. The offer is only 2.4 per cent higher than that. And as the counter has been suspended since just before details of the new rail financing framework were announced last Friday, no one knows how that landmark framework would have affected SMRT's market valuation.

Sure, analysts have largely been pessimistic, with most revising their target price downwards. Still, the market has been known to have its own gut instincts.

On May 20, 2014, when rumours emerged that the Government would restructure the bus industry, SMRT's share price shot up by 14 cents or 10.9 per cent to reach an 11-month high of $1.48. It was among the day's top gainers.

In essence, the new rail financing framework is not unlike the bus industry revamp. In both cases, the Government takes over the operating assets, freeing the operator from hefty and often lumpy capital expenditures.

It is a positive move that will make SMRT a more sustainable business in the long run. That much, the management acknowledges.

So it is puzzling that the operator and its main shareholder were not more upbeat about the transition.

It is equally puzzling that Temasek has not made a general offer. Instead, it has effected a scheme of arrangement, which is often associated with mergers or the restructuring of a troubled entity.

In the scheme of arrangement, Temasek would require a 75 per cent acceptance rate, versus 90 per cent for a general offer. By virtue of that, it is likely it would have had to offer a better price for a general offer. Temasek said it picked a scheme of arrangement because it was not looking to raise its shareholding (54 per cent), but instead wanted to delist the firm. Still, no one would have stopped it if it had chosen to make a general offer.

It is interesting that Temasek's $1.68 offer would amount to a total consideration of $1.1 billion, which is almost identical to the sum that the Government has agreed to pay for SMRT's operating assets.

Does that mean the state will eventually be financing Temasek's buyout? If one were to see Temasek and the state as being different parts of the same machinery, that question does not matter.

Many shareholders will no doubt see the $1.68 offer as low, especially if they had bought the stock between 2007 and 2011. Still, they might change their minds once trading resumes today. With Temasek's non-revisable offer on the table, it is unlikely it will rise above $1.68.

Then again, those who view the cup as half full might say the stock would not plunge for the same reason.

A version of this article appeared in the print edition of The Straits Times on July 21, 2016, with the headline 'A positive move with a puzzling twist'. Print Edition | Subscribe