Food firms under SATS umbrella to reap big gains

An SFI-Country Foods entity seen as a sizeable regional player


AN integrated pan-Asian food giant with a footprint stretching from India, through South-east Asia and into China.

That is the vision of Frankie Tan, founder and CEO of Country Foods, the frozen food subsidiary of Singapore Airport Terminal Services (SATS)

Country Foods was set up in 1989 by Mr Tan as a processed food and sauce maker.

After a decade of strong growth, the company caught the eye of SATS, which paid about $6 million for a 66.7 per cent stake in 2002.

Realising the market potential of frozen food, especially in the low-cost airline segment, SATS bought the other 33.3 per cent of Country Foods for another $5.6 million last year, making it a wholly owned subsidiary.

‘By 2000, we had reached the stage where we needed to scale up for further expansion,’ said Mr Tan, who is a minority shareholder of SATS. ‘SATS gave us that scale and exposure.’

Country Foods seems to have been somewhat of an appetiser for SATS, which six years later has moved to acquire the much larger listed Singapore Food Industries (SFI).

BT understands that SATS looked at SFI in 2001 but decided to go after the smaller Country Foods first.

The decision seems to have paid off.

Today, Country Foods, with revenue of more than $30 million, is one of the fastest-growing suppliers of frozen and processed food in Singapore.

Besides fast-food outlets such as McDonald’s, Pizza Hut, 7-Eleven and Burger King, its customers include hospitals and several hospitality industry players.

Its Macau unit dominates the frozen and processed food market for staff eateries and food outlets in the territory’s casinos. Plans are already underway to expand into Hong Kong.

Mr Tan envisages similar opportunities at Singapore’s two integrated resorts, which will employ some 20,000 people.

Meanwhile, Country Foods is already in talks to supply frozen meals to budget carriers including Tiger Airways, Cebu Pacific and Jetstar.

It already provides in-flight meals and frozen deserts to several Asian and Middle Eastern full-service carriers.

‘In Europe, virtually all the airlines serve frozen and chilled food on board,’ Mr Tan said. ‘But the concept is still in its infancy in Asia, largely because catering costs are still relatively low here.’

But with costs, quality and consistency of supply (or food security) becoming hot-button issues not just for airlines, but other businesses too, Mr Tan sees huge growth in Asia.

And this is where SFI comes into the picture.

‘SFI is a huge player, especially in logistics, procurement and mass volume catering,’ he said.

‘It also has a presence in other markets. We see huge synergies in teaming up with it under the SATS umbrella. There will be big economies of scale from the combined operations. And we will have the critical size to provide end-to-end support to customers.’

SATS has moved to buy Temasek Holdings’ 69.6 per cent of listed SFI at 93 cents per share.

And with a general offer a certainty, the total purchase price will be $509 million.

SATS reckons SFI will make it a world-class group powered by the twin engines of airport and food services, lessening its exposure to the vagaries of the aviation market.

Mr Tan sees an integrated SFI-Country Foods entity as a sizeable regional player with a footprint stretching from South Asia, through South-east Asia and into North-east Asia.

Indeed, the numbers seem to point in that direction.

The Singapore in-flight catering market is worth about $500 million, of which SATS controls 80 per cent or $400 million.

With the takeover of SFI, SATS food business will immediately grow by $700 million. Then there is Country Foods, whose revenue is more than $30 million.

Looking ahead, new growth will come from the expansion of the frozen and chilled food segment, said Mr Tan.

‘The food business is relatively stable,’ he said. ‘Because barriers to entry are low, it is a competitive business. But if you have the size and technology, you will have the economies of scale to dominate the market.’

And that is exactly what SATS seems intent on doing with the takeover of SFI.

Singapore Food Industries shutting down Swissco

Analysts see move to wind up loss-making business as a boost for SFI

SINGAPORE Food Industries (SFI) is shutting down its Ireland-based loss-making business which had raised concerns amongst minority shareholders of its predator, Singapore Airport Terminal Services (SATS).

SFI said that it had asked the High Court of Dublin to wind up operations of its loss-making convenience food business, Swissco. Swissco is 100 per cent owned by SFI’s Cresset Ltd.

The business has been bleeding to the tune of almost $8 million, raising concerns amongst shareholders of SATS.

The Changi Airport ground operator and Singapore Airline subsidiary recently 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.

But some minority shareholders of SATS had expressed reservations about some of SFI’s businesses which the former would be ingesting. And Swissco was a key concern.

SFI had hoped to sell the business, thus avoiding the costs of closing it down, but found little interest in the market.

Analysts reckon that the removal of Swissco will boost SFI’s balance sheet and profitability significantly.

‘While valuations of 15x earnings and 3x book are not cheap, SFI’s core earnings are depressed by one-time charges and overseas subsidiary losses,’ Kim Eng noted in a report.

‘After adjusting for losses at subsidiaries to be sold, we estimate SFI’s FY2007 profits at 34 per cent higher than reported, which would reduce SATS’ buyout valuation to 11x earnings, below SATS’ current 12.5x P/E.’

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.

SATS’ move on SFI could prove the cynics wrong

IN TIMES like these, even the best of intentions can sometimes be brushed aside with cynicism.

The $334.5 million purchase of Singapore Food Industries (SFI) by Singapore Airport Terminal Services (SATS) – which could balloon to $509 million if the general offer is completed – has already attracted a good dose of scepticism. Some observers have dismissed it as being nothing more than an exercise by Temasek Holdings – which controls 69 per cent of SFI and has indirect control of SATS via its parent Singapore Airlines (SIA) – to dress up its books to offset paper losses on some of its other investments.

Shareholders of SATS should judge the deal on its own merits. The issue for them is whether this deal enhances the value of their asset. Is this a synergistic marriage where the enlarged entity will be much larger and more successful than the sum of its parts? Will the acquisition boost the airport ground services specialist’s cash, ROE, revenue, earnings per share and, potentially, dividend payout? Finally, will the acquisition provide SATS’ food services business the cushion it seeks from the volatility and vagaries of the aviation sector?

This 80 per cent SIA-owned company has been struggling with rising material costs, slowing aviation-side revenues, and lower contributions from associates. Its net earnings dropped a massive 31 per cent to $67 million for the half-year ended September. Going forward, there are few signs that the squeeze on both the top line and bottom line will ease up.

Soon after arriving to take over the helm last year, CEO and president Clement Woon realised that the company had to review its long-term business strategy to ensure sustainable growth.

SATS gets almost all its revenues from within Singapore, of which two-thirds comes from the parent SIA group. About 54 per cent comes from airport services.

During its so-named Capital Markets Day briefings for analysts and media in September, Mr Woon laid out his plans: while SATS will continue to be a key player at Changi Airport, where it controls about 80 per cent of the market, it will not be totally focused on aviation. It will expand into the more resilient and defensive non-aviation food business by working closely with hotels, hospitals and other such service providers, including the integrated resorts (IRs), the new Sports Hub and such.

Fortunately, sitting on some $740 million in cash (net cash of $528 million after debt) gave Mr Woon the necessary firepower to put his plans into action. The numbers suggest that SATS may indeed – at least on the face of it – have found the best target for its stated aims in the food business.

Incorporated in 1973, SFI is Singapore’s largest integrated food company operating in food distribution, food preparation, catering, processing, and manufacturing, and abattoir and hog auctions. The company’s key markets are Singapore, the UK/Ireland, Australia, New Zealand, and China. Its brands of frozen convenience foods are found on the supermarket shelves of Tesco and Sainsbury’s in the UK. It sells some $200 million worth of meat and poultry every year. It also ‘feeds’ the Singapore Armed Forces.

Last year, Europe accounted for almost two-thirds of SFI’s sales and 45 per cent of its profit, while Singapore accounted for a third of revenue and 47 per cent of profits.

The mainboard-listed company made a profit of $31.4 million last year – slightly higher than the FY06 figure of $30.2 million.

What SATS gets through SFI is immediate exposure to a resilient business with a strong global customer base. The deal will, on a pro forma basis, boost EPS by 11.3 per cent to 20.1 per cent; raise ROE by 11.5 per cent to 16.1 per cent, and hoist total revenue by 75 per cent to $1.7 billion. More importantly, SATS’ footprint in the sizeable non-aviation food services segment will grow immediately, compared to years it would have taken the company to build up such a business. The takeover also instantly boosts SATS’ offshore revenue to 28 per cent, and non-aviation-related food revenue to 43 per cent.

Of course, there are execution risks.

But there are execution risks in any deal of this size, where one company buys another and takes over its entire business. Such risks have to be seen in the context of the capacity of the management to execute. Given Mr Woon and his team’s capabilities, and the fact that SFI is a homegrown player – sharing the same basic business philosophy as that of other local companies like SATS – should provide some comfort.

Could SATS have bought something for less? Some analysts reckon that at three times book, 13 times earnings multiple and 7.4 times Ebitda, the price is a bit rich.

Perhaps. But Mr Woon is no novice. Having earned his stripes in international companies and on a global stage, he deserves the benefit of the doubt – for now. In any case, this new CEO and his team will face their critics come May next year, when SATS unveils its final numbers and provides preliminary guidance on how the new ‘baby’ is doing.

As they say, the proof of the pudding is in the eating.

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.