SFI – BT

SATS takes SFI on its plate to spread wings

It is paying $334.5m for Temasek’s 69.68% stake; deal sparks general offer

In an effort to lessen its dependence on the volatile aviation sector, Singapore Airport Terminal Services (SATS) is buying up Temasek Holdings’ 69.68 per cent stake in listed Singapore Food Industries Ltd (SFI) for some $334.5 million.

The value of the purchase, which is already the biggest M&A deal this quarter, could balloon to $509 million if the general offer triggered by the deal results in the Singapore Airlines subsidiary picking up the entire share capital of SFI.

At 93 cents per share, the purchase price is about 3 per cent above the last traded price of SFI of 90.5 cents prior to the lunchbreak suspension yesterday.

SATS is buying SFI at about 13 times historical net earnings and 7.4 times its FY2007 earnings before interest, tax, depreciation and amortisation (Ebitda).

SATS said the purchase of SFI would give it both the scale of operations and access to wider customer segments in the non-aviation related food industry. It also envisaged an immediate expansion into new markets like the United Kingdom, where SFI has a strong presence.

SFI is one of the largest integrated food players in Singapore, specialising in importing, producing and distributing chilled and frozen meats and meals. Besides supplying food to the Singapore Armed Forces, it exports processed and chilled meats and foods to over half a dozen countries in the Asia-Pacific region.

It has a strong presence in the United Kingdom where its unit, Daniels Group, supplies juices, frozen meals and soups to supermarket chains like Tesco and Sainsbury.

Clement Woon, SATS’ president and chief executive, said the acquisition would wean his company away from the vagaries of the aviation sector, which is currently facing its most serious slowdown since 2001.

‘We have been tied too closely to the aviation market and are a slave to the airport and airline business,’ he said. ‘With this acquisition we want to ensure that we are not just a sitting duck. We are taking our fortunes into our own hands.’

The deal would also give SATS a ‘much more balanced portfolio’ than it has today, he added.

Faced with increasing costs, a slowing revenue environment, and lower contributions from associates, SATS reported a net attributable profit of $32.4 million for its July-September second quarter, down 33.5 per cent from $48.7 million a year earlier.

The results translated to a 30.6 per cent drop in first-half earnings to $66.9 million at end-September, from $96.4 million a year earlier.

But sitting on cash and near-cash holdings of some $736 million at the end of the first half, including $40 million in non-equity investments, Mr Woon had repeatedly said that his company would go on an acquisition drive to ensure long term sustainable growth and competitiveness.

SATS is financing the purchase entirely from internal reserves.

The acquisition is cash, earnings and ROE accretive.

It will boost SATS pro-forma EPS from 18.1 cents to 20.1 cents, based on FY07/08 financials, while ROE would be boosted from 14.4 per cent to 16.1 per cent. Mr Woon said that given the strong cash and cashflow of both businesses, SATS shareholders can expect even more generous dividend payouts.

The deal will significantly diversify SATS away from being a pure aviation play.

Its airport services revenue, on a pro-forma basis, would fall from 54 per cent to 31 per cent, post consolidation, while it would have a 43 per cent revenue share from non-aviation food services. Aviation food services would account for 24 per cent of revenue. In terms of geographical spread, revenue from overseas will increase from 0.3 per cent to 28 per cent.

Mr Woon envisages SATS expanding aggressively into the supply of food to non-aviation businesses like hospitals, hotels, integrated resorts and fast food chains: ‘We need to boost our core competitiveness, take control of our growth and diversify. We will now have the critical size and market presence to do this.’

This deal comes just months after SATS took 100 per cent control of Singapore-based industrial caterer, Country Foods.

Analysts seem to like the move.

‘This seems like a well thought-out move to diversify and spread risks by SATS, while also expanding its scale through its exposure to SFI’s significant customer base,’ said Vincent Ng of S&P’s Asian Equity Research.

Keith Magnus, managing director and head of Merrill Lynch’s investment banking division in Singapore (which is advising SATS) said companies with strong balance sheets and cash were well positioned to buy other synergistic businesses at fair value under the current economic conditions.

‘The acquisition of SFI is an important step in the execution of SATS’ strategy to extend its core food services business,’ he said. ‘The fit is complementary and the opportunity for synergies and cross-sell are exciting.’

SATS shareholders will vote on the deal in January, with the general offer opening in February. SIA and Temasek will abstain from voting.

SFI is being advised by Credit Suisse.

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