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Irate shareholders could thwart SMRT privatisation

SINGAPORE — Temasek Holdings’ move to take transport operator SMRT private — which will be put to a vote by shareholders later this month — could face a potential roadblock, amid unhappiness among some investors over the new rail financing framework (NRFF), even as the independent financial adviser to the company called the offer fair and reasonable.

Irate shareholders could thwart SMRT privatisation

SMRT trains seen at Bishan Depot on 15 Jul 2016. Photo: Ooi Boon Keong

SINGAPORE — Temasek Holdings’ move to take transport operator SMRT private — which will be put to a vote by shareholders later this month — could face a potential roadblock, amid unhappiness among some investors over the new rail financing framework (NRFF), even as the independent financial adviser to the company called the offer fair and reasonable.

Temasek’s wholly-owned subsidiary Belford has proposed to buy the 46 per cent of SMRT shares that the state fund does not already hold, by way of a scheme of arrangement at S$1.68 per share. In a notice posted on the Singapore Exchange’s website on Tuesday (Sept 6), SMRT said the shareholder vote will be held on Sept 29 following an extraordinary general meeting (EGM) on the proposed sale of its operating assets to the Land Transport Authority (LTA) as part of the transition to the NRFF.

OCBC Investment Research analyst Eugene Chua said: “As there is the risk of the proposed buyout by Temasek falling through, we advise investors to look for opportunities to sell part of their holdings in the open market closer to S$1.68.”

Two conditions must be met for the privatization and delisting of SMRT to occur: More than 50 per cent of shareholders present in person or by proxy must vote to approve, and they must hold at least 75 per cent of the value of SMRT shares among those present at the meeting.

“The scheme price will not be increased,” SMRT reiterated in its 292-page scheme document released to shareholders yesterday. Rothschild, the independent financial adviser to SMRT, said it is of the opinion that the scheme is “fair and reasonable”. It advises the independent directors of SMRT to recommend that the shareholders vote in favour of the scheme or sell their shares in the open market if they are able to obtain a price higher than the scheme price, after netting off the related transaction expenses. SMRT’s independent directors have agreed with Rothschild’s recommendations.

The Securities Investors Association (Singapore) will arrange another dialogue session with SMRT soon for shareholders to put their views to the board and senior management, said Mr David Gerald, president of the investor rights watchdog. 

DBS analyst Andy Sim noted that the outcome of the voting would be “closely watched”. He said: “We suggested investors to accept the offer given subdued future profit expectations with the upside benefits capped in view of the NRFF. A special dividend payout from the asset sale is unlikely as SMRT has undertaken debts to finance those assets previously. If votes against the deal are more, and the offer is voted down, it may negatively impact SMRT share price.”

Temasek in July offered to take SMRT private to allow the transport operator to focus on its primary role of providing public transport service and free it from the costs and distractions linked to listing requirements. The offer followed SMRT’s announcement that it will sell its operating assets to the LTA as part of the transition to the NRFF, which caps SMRT’s EBIT (earnings before interest and tax) margin at 5 per cent. 

“I will vote against the scheme. I feel the NRFF is not fairly worked out, which is the key problem. Temasek conveniently stepped in with an offer to buy out minority shareholders immediately after management secured a poor deal from LTA,” said Mr Mano Sabnani, a veteran market watcher and a shareholder in SMRT.

Another SMRT shareholder who wanted to be known only as Ms Tan, said: “I’m going so that I can vote no. I hope the other shareholders vote no too. I believe we should be getting more than S$1.68 per share, and, we should not be getting any less than what we deserve.”

Even for a relatively poor year like the last one, SMRT was getting an EBIT margin much higher than 5 per cent, with most of their profit coming in from non-rail businesses such as the rental of shops and advertising, Mr Sabnani noted. With S$850 million in revenue last year, SMRT made S$110 million EBIT, translating into a return of 13 per cent. The new formula of 5 per cent EBIT on S$850 million revenue meant an EBIT of only S$42.5 million. 

 “That is less than half of last FY’s EBIT. The question is why a 5 per cent EBIT on group revenue accepted? Also, the new formula includes rail and non-rail businesses. This is way too low, probably the lowest in its history. So the new formula is not really offering any return on the rail business,” Mr Sabnani said. 

Since management has accepted this formula, he noted, analysts have downgraded SMRT with some saying the offer price of S$1.68 is fair. 

“But it would only be fair because of the low EBIT formula. If EBIT were a fairer 10 per cent or a 10 per cent margin on turnover was available, the profits of SMRT group would be very different. Then the valuation would also be very different. Then S$1.68 would not look attractive,” he said.

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