Understanding Temasek's rail ambitions

Temasek Holdings wants to support the company's "strategy and business model for the long term."

Does this sound familiar?

Temasek actually said this back in 2014, in reference to its offer for commodity-trading firm Olam International.

It was to echo similar ideas on Wednesday evening, when it announced that it was looking to buy SMRT out for S$1.2 billion.

After the announcement of the new rail financing framework (NRFF), Temasek said it was clearer about the regulatory risks SMRT was facing, and that, as a 54-per-cent shareholder, it could now look at how best to bring SMRT forward, to help it "focus", said Chia Song Hwee, Temasek International president, at the analyst and media briefing two nights ago.

This echoed the ideals Temasek had espoused for the Olam bid. The difference is that now, Temasek seems to have a stronger resolve and confidence in delisting SMRT.

Not only did it come up with the proposal over this past weekend, it aims to achieve the buyout through a scheme of arrangement - a path it has chosen because it aims to delist SMRT, not because it is looking to raise its shareholding.

This scheme means that a majority of shareholders who hold at least 75 per cent of shares must approve the deal, or it will fall through. Temasek's S$1.68 cash per share would be the final price; if it fails in its bid this time, it would have to wait a year before launching another.

The more commonly-used method would have been the general offer - the option it took with Olam - which would have allowed other suitors to step in if Temasek's offer is too low for SMRT.

Bid prices often rise as a result.

But who would want to compete with Temasek to acquire SMRT - a company that has not only drawn intense scrutiny over the years from commuters and shareholders, but now also has to withstand regulatory, revenue and ridership risks under the NRFF?

So it seems Temasek was daring in its approach as it senses that no one else would come along. Its senior managing director Juliet Teo declared: "It's an all-or-nothing (deal)."

Minority shareholders would do well to remember these points.

Expected returns

But aside from the long-term ideals, why acquire SMRT in the first place? At the briefing, analysts and the media zoomed in on making sense out of the dollars and cents.

First, the expected returns. The annual licence-charge structure under the NRFF provides a revenue shortfall-sharing and a profit-sharing mechanism based on a tiered Ebit (earnings before interest and tax) cap starting at 5 per cent and an Ebit collar at 3.5 per cent.

Observers have said this is not a sweet deal for SMRT.

To this, Mr Chia replied that it was very difficult to gauge returns at this point, as SMRT transits from the current financing framework to the NRFF, but "given time and focus, hopefully the company can perform at the upper end of the (Ebit) range".

Next, revenue and ridership risks - the two risks that impact SMRT's revenue, its management had said.

Ms Teo responded that these are out of SMRT's control. In taking a longer-term view, Temasek is "prepared to stick up with" volatilities.

When asked about expected cost savings, SMRT's chief executive officer Desmond Kuek said that other than savings on listing costs, this issue has not been thought about yet.

All these make Temasek's efforts to help SMRT seem valiant.

Mak Yuen Teen, associate professor at the National University of Singapore Business School, told The Business Times: "If it says it is taking it private to help SMRT, this is a sort of 'national service', which goes against its public position that it makes decisions on a purely commercial basis."

S&P Global Ratings took it a step farther, saying that in maintaining its rating for SMRT, it has incorporated a very strong link between SMRT and, through Temasek, Singapore's government.

Why the urgency then?

Mr Kuek said that restructuring plans would continue at SMRT, so that there would be differentiation between the public transport side and its other business lines.

Putting this together with what Mr Chia and Ms Teo said about Temasek taking a longer-term view with this takeover, it seems that changes are on track at SMRT, and it needs more consensus among various stakeholders to pull it through as it battles Singapore's fast-changing public transport landscape.

This article was first published on July 22, 2016.
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