Would CapitaLand’s Investors Be Getting A Good Deal by Paying More for CapitaMalls Asia?

In a deal that might see CapitaLand (SGX: C31) spend around S$3.2 billion, the real estate company (one of the largest in Asia) had just upped its offer for its majority-owned subsidiary CapitaMalls Asia (SGX: JS8).

CapitaMalls Asia represents the bulk of CapitaLand’s operational interests in pan-Asian retail malls; the former has 105 malls in its portfolio located in Singapore, China, India, Malaysia, and Japan that are worth close to S$34 billion in total.

A month ago in April, CapitaLand had launched a privatisation offer to buy up the remaining shares of CapitaMalls Asia that it did not yet own for S$2.22 per share, or S$3.06 billion in total. At that time, CapitaLand controlled around 65% of CapitaMalls Asia. This morning, CapitaLand revealed that it would be willing to fork out S$2.35 per share instead.

CapitaLand also made two other pertinent changes to its initial offer plan. The first deals with the conditions of its privatisation offer. Initially, CapitaLand’s offer would only take place if it wound up owning more than 90% of CapitaMalls Asia after the exercise ended. That meant that CapitaLand could have ended up not buying shares of CapitaMalls Asia if the condition wasn’t met. Now, the 90%-ownership condition has been scrapped; CapitaLand would be buying over all of CapitaMalls Asia’s shares that are tendered. Minority owners of CapitaMalls Asia who had previously accepted the S$2.22 offer would also be paid the new offer price of S$2.35 instead.

The second change deals with dates: The privatisation offer would end on 9 June 2014 instead of the initial date of 26 May 2014. This would give CapitaMalls Asia’s investors more time to mull over the deal.

In the meantime, CapitaLand’s shareholders should also be thinking about how the acquisition might affect the company with the higher offer price.

What does it mean for CapitaLand?

There were important strategic reasons for CapitaLand’s offer as the company could see synergies developing with the acquisition. Absorbing CapitaMalls Asia completely could also help bump up profits at the company.

However, the acquisition also brought with it financial risks. According to pro-forma financials prepared by CapitaLand, the deal would have seen its net debt to equity ratio for 2013 expand from 0.39 to 0.59 times. Now, with the higher price offered, CapitaLand would be inching up the level of leverage it would be taking on if the deal gets completed; this is something investors have to note.

Growth at CapitaMalls Asia, while being consistent, has also not being excellent. Since 2009, book value per share at the retail mall owner has increased at an average compounded annual rate of around 7% to its current level of S$1.87. A relatively-slow growth rate like that might not warrant a 26% premium to book value that CapitaLand’s willing to pay for CapitaMalls Asia’s shares now.

Lastly, like I’ve mentioned before, the burgeoning growth of online retail might pose a threat to traditional retail malls. Such a phenomenon has been developing in the US with Howard Schultz, chief executive of coffee retail powerhouse Starbucks (NYSE: SBUX), commenting earlier this year that he thinks the shift from traditional retail to online retail is a permanent and comprehensive one. While such trends may or may not be that obvious in Asia yet, it’s certainly something worth keeping an eye on especially given the size of the bet that CapitaLand is making with CapitaMalls Asia.

Investor Howard Marks once said: “It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.” In other words, the validity of any investment or acquisition made by a company would hinge on the price that’s being paid. For investors of CapitaLand, they might do well to think of whether the acquisition of CapitaMalls Asia makes sense for the company based on the new price that’s paid.

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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 owns shares in Starbucks.