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Is It Smart For CapitaLand To Privatise CapitaMalls Asia?

CapitaLand (SGX: C31), one of Asia’s largest real estate companies, made known in the afternoon today that it intends to take its 65.3%-owned subsidiary CapitaMalls Asia (SGX: JS8) private by offering to buy up stakes in the latter that it does not yet own for S$2.22 per share.

CapitaMalls Asia currently represents most of CapitaLand’s interests in retail properties in Singapore, China, India, Japan, and Malaysia. With a portfolio of 85 operational retail malls (and 20 more in the pipelines being planned for in the future), CapitaMalls Asia has a book value of S$9.86 billion, or S$1.84 per share. At CapitaMalls Asia’s current share price of S$1.805, CapitaLand’s offer thus represents a 23% and 21% premium over CapitaMalls Asia’s share price and book value respectively.

The deal offered by CapitaLand is currently conditional on it receiving acceptances from CapitaMalls Asia’s minority shareholders such that the former would wind up controlling more than 90% of the latter. While there are considerations for CapitaMalls Asia’s investors to run through regarding the offer, what would CapitaLand’s investors actually gain from the deal? The sum of S$3.06 billion being bandied around for the takeover isn’t exactly chump change, so it’s only right for CapitaLand’s investors to think about it.

According to the company’s press release, there are a few key reasons for CapitaLand’s takeover offer.

1) CapitaLand’s integrated developments can be enhanced by absorbing CapitaMalls Asia

CapitaLand has a business strategy termed “One CapitaLand” where the company “harness[es] the key strengths of its various business units to create differentiated real estate projects and enhance overall project returns.”

By taking CapitaMalls Asia private, CapitaLand would be able to focus its resources on the projects that could potentially deliver the best returns.

2) A simplified organisational structure

CapitaLand sees the privatisation as helping to simplify its organisational structure. Assuming the deal goes through, the entire corporate umbrella of CapitaLand would consist of a single listed developer (CapitaLand), and five publicly-listed real estate investment trusts that includes CapitaCommercial Trust (SGX: C61U), CapitaMall Trust (SGX: C38U), CapitaRetail China Trust (SGX: AU8U), CapitaMalls Malaysia Trust, and Ascott Residence Trust (SGX: A68U). These REITs are meant to recycle capital for CapitaLand by purchasing its assets so that the developer would have fresh funds to engage in other development projects.

With the delisting of CapitaMalls Asia, CapitaLand feels that it would “provide investors with a clear investment proposition” as it will have “a good balance between recurring income from REITs and investment properties, and development income from its development activities.” The company also believes that a reorganisation would give it “sharper focus”.

3) Acquisition helps improve CapitaLand’s finances

Despite wanting to takeover CapitaMalls Asia at 1.2 times its book value, CapitaLand would see its earnings per share for 2013 jump by 21.5% and return on equity increase from 5.4% to 6.7% assuming the deal goes through.

In addition, the acquisition would see CapitaLand’s total assets grow by 13.4% on a pro-forma basis (i.e. the financials are prepared as if the takeover has been completed) for 2013.

Foolish Bottom Line

CapitaLand’s shares have fallen by the way-side over the past 5 years since 14 April 2009; despite the Straits Times Index (SGX: ^STI) jumping by 69.4% from 1,897 points to 3,214 points, CapitaLand’s share price has remained essentially flat at S$2.92. Thing is, that’s really not a surprise given how CapitaLand’s book value per share has remained essentially unchanged from S$3.783 in 2008 to S$3.775 in 2013.

With CapitaLand’s latest manoeuvre to improve its earnings profile and enlarge its asset base, investors must be hoping this could help drive the company’s corporate performance going forward.

But while there are advantages to the takeover as mentioned above, there’re also some key risks to consider. The most important would be the competitive threats that online retailing would pose to traditional retail malls in China and Singapore (CapitaMalls Asia’s key markets). For instance, research outfit Forrester Research predicted that online retail sales in China would grow from US$294 billion in 2013 to US$672 billion in 2018. With such stunning growth rates (a 129% increase in 5 years!) predicted, it wouldn’t be prudent to simply wave off the threat of online retail in China, at least.

Another important issue to think about would be the balance sheet of CapitaLand assuming the deal’s done. According to financials prepared by the company based on its financial performance for 2013, total cash on hand would fall significantly from S$6.31 billion to S$3.51 billion while its net debt (total debt minus total cash) to equity ratio would have increased from 0.39 times to 0.59 times. Investors of CapitaLand would have to figure out if that’s a level of financial leverage that they’re comfortable with in the company.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.