Why Have Both CitySpring Infrastructure Trust and Keppel Infrastructure Trust Jumped In Price?

At the time of writing (4:21 pm, 19 November 2014), the prices of the units of CitySpring Infrastructure Trust (SGX: A7RU)and Keppel Infrastructure Trust (SGX: LH4U) have risen by 5.83% and 3.83% respectively since Friday’s close. The two trusts had been halted from trading since Monday morning due to pending announcements and the halts were lifted just this morning.

The two business trusts had requested for trading halts over the past few days because they were exploring a possible merger.

The talks were concluded yesterday evening and both trusts had jointly released further details of their merger plans. It seems the market’s given its thumb of approval for both trusts to merge judging from their share price jumps today.

What’s the deal about?

The merger will see CIT swallowing up “all the business undertakings and assets” of KIT. In exchange, CIT would be issuing 1.3 billion new units of itself to KIT’s current unit-holders; owners of KIT’s units are set to receive 2.106 units of CIT for every unit of KIT owned. The ratio was set based on the market capitalisations of the two trusts and it is “not subject to any adjustment”.

Once the merger’s completed, Singapore’s largest infrastructure-focused business trust, with total assets of more than S$4 billion, will be created. CIT will then be renamed as Keppel Infrastructure Trust.

Keppel Corporation Limited (SGX: BN4) will become the combined-entity’s largest unit-holder while Temasek Holdings, one of the Singapore government’s investment arms, will become the second largest owner.

The merger announcement also revealed that KIT is looking to acquire a 51% stake in Keppel Merlimau Cogen Pte. Ltd., an owner of a 1,300 megawatt combined cycle gas turbine power generation facility on Jurong Island, Singapore. The power facility, whose 51% stake will cost KIT some S$510 million, will form an integral part of the merged trust. KIT has proposed to finance the acquisition of the power facility through an equity fund-raising exercise.

Prior to the completion of the proposed merger, unit-holders of CIT will receive a one-time distribution of S$30 million. After the completion of the deal, the new merged trust will make a one-time S$30 million distribution to its expanded base of unit-holders.

These transactions are subjected to the approval of minority unit-holders of KIT and CIT; major owners of both business trusts, such as Keppel Corporation and Temasek, are barred from voting. If all goes smoothly, the transactions are expected to be completed in the second quarter of 2015.

The assets of the merged trust

KIT’s current portfolio consists of the incineration plants, Senoko Waste-to-Energy Plant and Keppel Seghers Tuas Waste-to-Energy Plant; Ulu Pandan NEWater Plant; and the proposed acquisition of the 51% stake in KMC.

Meanwhile, CIT’s portfolio consists of City Gas, the sole producer and retailer of town gas in Singapore; SingSpring, Singapore’s first large-scale seawater desalination plant; Basslink, the only electricity interconnector between Tasmania and mainland Australia; CityNet, trustee-manager of Netlink Trust, which owns, installs, operates, and maintains the fibre network in Singapore; and DataCentre One, a datacentre which is estimated to be completed in the first quarter of 2016.

All these assets will be part of the merged trust.

What’s in it for unit-holders?

The deal is set to boost the distribution per unit (DPU) for existing unit-holders of both KIT and CIT. KIT’s latest annual DPU, as of the financial year ended 31 December 2013, was at 7.82 Singapore cents. Meanwhile, CIT’s last annual DPU, for the financial year ended 31 March 2014, came in at 3.28 Singapore cents. Post-merger, the combined DPU will be in the range of 7.86 to 7.98 cents.

Besides higher distributions, a revised management fee structure for the merged trust have also been projected to give rise to around S$3.6 million in savings for the trust’s unit-holders.

Upon completion of the merger, Keppel Corporation, through its subsidiaries, will be both sponsor and manager of the merged trust. The subsidiaries in question have a track record of developing, owning, and operating infrastructure assets and thus, will be able to support the growth of the merged trust.

Mr Tong Yew Heng, Chief Executive Officer of the manager of CIT, commented on the merger: 

The Combined Trust will benefit from KI’s sponsorship and growth plans given its track record as a developer, owner and operator of infrastructure assets. Keppel’s sponsorship commitment, demonstrated through the KMC Acquisition, the Combined Trust having first rights over the remaining 49% of KMC, and the first right of refusal to acquire assets developed or incubated by KI, will benefit the Combined Trust’s acquisition pipeline.”

Foolish Bottomline

The deal seems to be a sweet one for unit-holders of both CIT and KIT. In addition to enjoying an increase in DPU, the sponsor of the merged trust would also be able to provide assets that could be injected into the trust in the future. On that note, having a committed sponsor is essential for any business trust. Also – and this is targeted toward existing investors in CIT – having a link to Keppel Corporation, one of the largest conglomerates inSingapore, might lead to stronger confidence from the market for CIT as compared to the current situation of it operating on it own.

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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 contributor Sudhan P doesn’t own shares in any companies mentioned.