SATS shareholder takes issue with SFI takeover

But Merrill Lynch says valuation is fair and there’s no conflict of interest

Are the shareholders of Singapore Airport Terminal Services (SATS) getting a raw deal in its Singapore Food Industries (SFI) takeover?

Some SATS minority shareholders seem to think so.

Stockbroker Ong Chin Woo, who owns 150,000 shares, has sent letters to both SATS and the media, voicing his concern that, among other things, SATS is not only overpaying for SFI, but has failed to carefully evaluate the balance sheet and business ‘risks’ of SFI.

All this comes just weeks after the Changi Airport ground operator announced a $335 million takeover of Temasek Holdings’ 69 per cent stake in Singapore’s largest integrated food specialist. The value of the deal is likely to balloon to $509 million following an expected general offer.

Mr Ong, who claims to represent a group of minority shareholders that hold some four million SATS shares, contends that the valuation methodology used to price SFI at 93 cents per share, or a price-to-book of over three times, ‘is not comprehensive’ nor ‘compelling’, and says this is a ‘huge premium to SATS’ own valuation’.

He notes that only the EV/Ebitda measure was used in the market comparables, while weighted average cost of capital for SATS and the internal rate of return (IRR) were not used as measures.

‘The proposed deal destroys value for SATS shareholders,’ Mr Ong claims.

He also notes that SFI’s balance sheet was highly leveraged (equity to asset of only 0.41 times), had high content of intangibles (intangible to total assets of 0.18 times), and large amount of accounts receivables to tangible equity (>1.4x tangible equity, raising risk of default in an economic crisis). He further says that SFI is a mature business, with low growth, low margin, ‘which would be a potential drag to SATS’.

Mr Ong also sees a potential conflict of interest with Merrill Lynch as SATS financial adviser, given that Temasek – which has an indirect stake in SATS via Singapore Airlines – is also a stakeholder of Merrill Lynch and its parent, Bank of America (BOA).

Merrill Lynch Singapore managing director for investment banking Keith Magnus, who is advising SATS, rebutted the claims, saying that they may have been well intentioned but were based on wrong premises.

‘First of all, Temasek has no influence on Merrill Lynch in any shape or form. It has no board seats and its stake will be diluted with the Bank of America takeover. In fact, Singapore’s Securities Industries Council has cleared Merrill to act as SATS’ financial adviser.’

Temasek Holdings has invested about US$6 billion in Merrill, with its 14 per cent making it the largest single investor. But following the US$50 billion takeover of Merrill by BOA, Temasek’s stake will be diluted to under 5 per cent.

Mr Magnus also dismissed Mr Ong’s contention that SFI was overvalued, saying that very rigorous methodologies were used to value the food specialist, including discounted cash flow analysis, full analysis of synergistic benefits and comparisons to similar companies in the public domain.

‘We’ve done a very detailed valuation exercise and the board met many times to scrutinise this,’ said Mr Magnus. ‘It’s a very fair valuation compared to peers. Mr Ong should also familiarise himself with the legal requirements in Singapore regarding disclosures, particularly Rule 1012 of the Listing Manual which makes it very onerous for companies in a takeover situation to make forward-looking statements, forecasts of profit, revenue and such.’

He said that companies such as SFI, where branding and the business model were the main assets, should be valued in terms of EV/Ebitda, rather than just pure tangible assets. He also referred to an Oct 23 Kim Eng report that described SFI as a ‘well-managed company with strong free cashflow, which are attractive traits for potential bidders in a takeover exercise’. Kim Eng’s fair-value range for the stock was 90 cents to $1.

As for accounts receivable, Mr Magnus added that SFI’s clients, such as the Singapore Armed Forces and UK supermarket giants Tesco and Sainsbury’s, were ‘pretty good’ credit.

In any case, he added, SATS’ minority shareholders and independent directors will be advised by ING Bank.

SATS claims that the deal would boost cash, ROE, revenue, earnings per share and also cushion it from the volatility and vagaries of the aviation sector. But some minority shareholders fear that with all its cash used up for the deal, SATS will have very little left over to pay the generous dividends which it is known for. With Temasek and SIA not voting, the fate of the deal lies in the hands of the minority shareholders.

Some might recall that Mr Ong successfully led a group of minority shareholders of Overseas Union Enterprise in 2005 to push the listed property company to sell its United Overseas Bank shares, to unlock shareholder value.

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