by: Tam Ging Wien
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On the 27th September 2018 (Thu), a trading halt was requested on share of Keppel Corporation Ltd (Keppel), Singapore Press Holdings Ltd (SPH) and M1 Ltd (M1) pending an announcement. It was widely speculated in the media that the announcement was related to the parties seeking a controlling stake in M1.
Within hours of the trading halt, a collaborative pre-conditional voluntary general offer was made by both Keppel and SPH seeking a controlling stake in M1 at $2.06 a share. This ended the speculation and brings a new twist to the March 2017 strategic review that were being conducted jointed by the 3 major shareholders of M1; namely Keppel T&T, SPH and Axiata Group Bhd (Axiata) which owns approximately 19%, 29% and 13% in M1 for a combined 61% stake.
After the trading halt was lifted, shares in M1 skyrocketed from $1.63 prior to the trading halt to end the week at $2.11 – surpassing the general offer price of $2.06.
Just a few days prior to this announcement, Keppel announced the privatization offer of subsidiary Keppel Telecommunications & Transportation Ltd (Keppel T&T) which it is the majority shareholder with a controlling stake of 79.22%. Keppel T&T in turn owns 19.33% stake in M1. This action needs to be considered in conjunction with the general offer for M1 as Keppel is using this privatisation offer to consolidate and control the full 19.33% of M1 through Keppel T&T.
Figure 1: Structure Before and After to the Privatisation of Keppel T&T Ltd
Source: ProButterfly Research
Both Keppel and SPH will collaborate to initiate the voluntary general offer for shares of M1 that they do not already own subjected to them achieving a controlling interest of at least 50% plus 1 share.
Figure 2: Structure Before the Keppel-SPH Collaboration
Source: ProButterfly Research
Both Keppel and SPH will form a joint venture entity known as Konnectivity Pte Ltd (Konnect). SPH will roll-over its existing 13.45% stake in M1 into Konnect and could invest up to ~$51.3mil in cash to partially fund this offer.
The offer price is $2.06 per share of M1, representing a 26% premium over the last traded price of M1 prior to the announcement.
Source: Keppel & SPH Joint Offer Presentation Slides
At this present moment, both Keppel and SPH own through its various subsidiaries at 19.33% and 13.45% stake in M1, giving a total stake of both entities 32.78%. This means that for this general offer to be successful, both Keppel and SPH must achieve at least >50.00% controlling stake in M1 – therefore at least 17.22% of the shares must voluntarily agree.
17.22% isn’t a very large amount of shares for this offer to be successful.
So, it would be anyone’s guess what the final shareholder structure would be.
Figure 3: Structure After the Keppel-SPH Collaboration and a Successful General Offer
Source: ProButterfly Research
The offer is also further subjected to approval of the relevant authorities such as the InfoComm Media Development Authority (IMDA). We will assume that this condition will likely be satisfied as we see no reason why IMDA would impede this deal. After all, any deal that would make the Singapore telcos more competitive will be welcomed.
Both Keppel and SPH has stated that the Singapore telco industry will experience treats from both incumbent players as well as a new entrance such as TPG Telecom and the rise of Mobile Virtual Network Operators (MVNOs) such as Circles.Life, Zero Mobile, Zero1 and MyRepublic. As a result of these treats, the market is subjected to:
Both Keppel and SPH intent to remain long term shareholders of M1 and would like the controlling stake in order to carry out multi-year extensive and strategic business transformation which will require long term management commitment such as:
We this that this is fair and in order not to impede decisions on such significant business transformation efforts, a controlling stake of at least 50% plus 1 share is reasonable.
This also indicates to us that the existing major shareholders are committed to ensuring M1 will continue to be relevant in the increasingly competitive telco markets.
Source: Keppel & SPH Joint Offer Presentation Slides
It would be approximately 9 weeks for the various shareholders to receive the dispatch of the offer document. Therefore from now until then, shareholders will have plenty of time to mull over the decision on whether or not to accept this general offer.
The first group of minority shareholders who owned the shares at a cost significantly below $2.00 would certainly welcome this deal. After all, they would already now be sitting on profits. These groups of shareholders could have purchased the shared in M1 throughout late-2016 till now when the share prices were depressed below $2.00. M1’s share price was hammered significantly after the announcement that the Singapore telco market will be opened up to the 4th telco operator. Investors view M1 to be the smallest of the 3 existing telcos in terms of market share and therefore the most venerable to the impact of the 4th telco.
However for another group of minority shareholders who had purchased share in M1 much higher than $2.00 would certainly want a much higher offer to at least equalize their capital loss.
There is also the significant shareholders such as Axiata who has a 28.70% stake in M1. Axiata has already publicly labelled the deal by Keppel-SPH as “opportunistic” and “inadequate” – stating that "the offer should reflect the accurate future value of M1 (inclusive of an acceptable control premium), consistent with market standards".
Axiata is clearly sending a message to the public that the offer of $2.06 is too low. This is not surprising since in March 2017 during the 3 party strategic review of their stake in M1, the share price of M1 traded around the range of $2.03 per share prior to the strategic review announcement. If at that time, Axiata was already expecting a significantly higher price from the last traded price, the current offer of $2.06 would certainly still be too low.
M1 shares closed the week at $2.11, above the offer price of $2.06. This indicates 2 possible scenarios or a combination of both:
At the last close price of $1.63 prior to the announcement, SPH has a stake of 13.45% or 124,453,000 shares in M1. This works out to a value of approximately $209mil. At the offer price of $2.06 per share, this stake would now be worth approximately $256mil; or approximately $47.3mil more.
SPH has already states that it is willing to spend up to $51.3mil in cash to partially fund this offer. The increase in value from SPH’s existing ownership just simply from this deal alone would net it close to $50mil in asset value increase on its balance sheet. Therefore spending another $50mil is nothing as the value is completely offset by the increase in value of its existing stake in M1!
So effectively, SPH is getting additional shares in M1 without significantly straining its balance sheet. The additional shares are from a valuation perspective, completely free to SPH!
The figures seem a little too close to be coincidental, therefore the amount that SPH is willing to fork out to partially fund the offer is likely structured very carefully – ensuring that SPH will not need to increase its debts. This would ultimately strengthen its balance sheet.
There is more than one way to value a stock. Hence for the purpose of this exercise, we will use 3 different methods in an attempt to estimate the fair value of M1.
Based on all 3 methods, we obtain a fair value higher than $2.06. The details of each method is elaborated below.
Source: ProButterfly Research, Yahoo! Finance, Monetary Authority of Singapore (MAS)
We have plotted the chart above for the Yield Spread of M1. The Yield Spread is calculated based on the difference between 12-months trailing yield and the Singapore SGS 10-Year bond yields. Based on the chart that we plotted, we derived that the average yield spread since 2012 is 3.59%.
The latest yield on the current Singapore SGS 10-Year bond is 2.50% at the time of writing. This therefore gives us an average yield of 6.09% over the last 8 years. The current 12-month trailing dividend is $0.114. M1 therefore will need to trade at $1.872 to achieve this yield spread today.
Using the same method as the above, the yield spread of one standard deviation below the average is calculated to be 2.33% and similarly; this entails a yield of 4.83%. Therefore M1 will be trading at $2.36 to achieve this yield spread today. We this that $2.36 is a fair price to pay for a general offer as such large acquisitions typically come with a market premium.
Using the closing prices of the year and the respective reported EBITDA, we calculated the Price/EBITDA per Share for each of the year since 2011. We obtained an average trading range of 14.75x.
Given that the current EBITDA as reported in M1’s Q2-2018 financial report is $307.6mil and the weighted average number of ordinary shares are $925.3mil, hence the EBITDA per Share is $0.1541. At 14.75x, this would give an average value of $2.27.
The calculated Operating Cash Flow per share for M1 is $0.2518. Assuming zero growth and a 6% discount rate over 15-years with no terminal value, we estimate that M1 would be worth $2.45.
Personally, after understanding the deal and estimating what M1 is worth, we think that $2.06 significantly undervalues M1. A fairly price would be at least $2.27 if not, it could be worth up to $2.45.
Taking a cue from Axiata’s public comments, we can assume that Axiata is likely to reject the offer at $2.06.
Using the “wisdom of the crowds”, considering that the open market price of M1 is already trading at a premium to the offer price, we would interpret this to mean that the markets are in generally also viewing this offer price to be too low.
Therefore we at ProButterfly who are existing shareholders of M1 are prepared to say no to this offer unless we get a price of at least in the range of $2.30 to $2.35.
However, there is a remote possibility that the following scenarios may also occur and hence would be the risk to existing shareholders:
If any of the above scenario plays out, it is very likely that M1’s stock price is going to free fall back to the $1.60 to $1.70 price range.
There is also a possibility that Keppel-SPH collectively succeeds through its efforts via the open market and through enough valid acceptance of the offer from minority shareholders that they success in acquiriting the 50% plus 1 share. In this specific scenario, M1’s stock price is likely to adjust back to $2.06
With the above understanding of the potential for a higher offer while recognizing the possibility of some risk, we still think that there could be quite a good chance that the current offer price could be revised higher and hence we will continue to hold and see how this deal will play out. We are willing to take this risk as we have acquired our shares in M1 significantly below $2.00 and we know that our downside is quite managed while our upside is worthwhile. We are in a good position to take this asymmetric bet.
For shareholders who are currently holding the shares as at cost significantly higher than $2.00, perhaps the decision will not be so easy. To wait or to sell? The truth is investing is rarely black or white. Investors in this situation could consider selling a portion of their shareholdings to balance the risk they are willing to take going forward.
What about you? What would you do as a shareholder? Write to us at [email protected] to tell us what you think.
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