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Who Really Wins In The $4b Infrastructure Merger?
Corporate Digest | 02 December 2014
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By: Shane Goh
Articles (99) Profile

Since news of the potential mega infrastructure merger between CitySpring Infrastructure Trust (CIT) and Keppel Infrastructure Trust (KIT) broke on 18 November, the counters have posted capital gains of 4.9 percent and 2.4 percent respectively, based on the closing prices of 28 November.

Deal Background

Assets under CIT include City Gas, the sole producer and retailer of town gas in Singapore; Basslink, the only electricity connector between Tasmania and mainland Australia and CityNet, the trustee-manager of Netlink Trust, which owns, installs and operates the fibre network in Singapore.

KIT portfolio comprises of incineration plants – Senoko Waste-to-Energy plant and Keppel Seghers Tuas Waste-to-Energy plant as well as Ulu Pandan NEWwater plant. The trust has also proposed an acquisition of a 51 percent stake in Keppel Merlimau Cogen (KMC), to be satisfied with an equity fund raising of up to $525 million.

CIT will issue about 1.3 billion new shares to KIT’s existing unitholders at a ratio of 2.106 CIT units for every unit of KIT owned. Upon completion, Keppel Corporation will become the single largest shareholder with about 22.9 percent of the trust while Temasek Holdings will be second with a stake of about 20 percent.

All assets under both trusts will be included in the merger, with a combined proforma total assets of over $4 billion, making it the largest Singapore infrastructure-focused business trust.

The combined trust will be renamed Keppel Infrastructure Trust with Keppel Infrastructure as its sponsor. The deal is expected to complete by 2Q15.

Potential Change In Business Mandate

In CIT’s prospectus, social infrastructure was identified as a type of investments that will fall under its purview. These include services in areas such as healthcare, education, housing and judicial facilities which are usually provided by the public sector or through public private partnership schemes.

On 2 May 2013, KIT’s former sponsor, Kepple Integrated Engineering, was reorganised and grouped under Keppel Infrastructure (KI). KI has three core business platforms in Gas-to-Power, Waste-to-Energy and X-to-Energy.

On 15 April, KIT held an extra-ordinary general meeting to change its name from K-Green Trust to better represent the nature and scope of assets that the trust may acquire.

This could potentially mean that the combined entity would be more focused on economic infrastructure which consists of services that the end user is prepared to pay for including utilities, transport/logistics and communications.

Looking at past acquisitions, apart from the initial injection of assets (Singspring and City Gas) from its sponsor, CIT’s three other assets came from external sources (Basslink, CityNet and DataCentre One). However, in KIT’s case, all of its assets were purchased from its sponsor.

Moving forward, while it’s clear that the combined entity will be focused on infrastructure investments, it’s unclear if it would look outside for opportunities or stick to assets from Keppel Infrastructure.

Could There Be A Conflict Of Interest?

Keppel Telecommunications and Transportation, a subsidiary of Keppel Corporation, has obtained an approval from its shareholders for its proposed listing of a data centre-focused real estate investment trust called Keppel DC REIT. The initial eight properties to be injected into the trust are located in Singapore, Australia and Europe.

Since data centre is part of CIT’s existing portfolio, through its stake in DataCentre One, an investor may ask: How would Keppel Corporation decide which trust, assuming both the merger and proposed listing plans pan out, to sell its future data centre properties to?

Is The KMC Acquisition Expensive?

KMC is a gas-fired power plant in Singapore located on Jurong Island with a total generating capacity of 1,300 megawatts (MW). The enterprise value of the plant is $1.7 billion, which translates to a cost of $1.3 million per MW.

The plant has an exclusive contract with Keppel Electric for the full capacity and a maximum capacity fee of $108 million a year as long as KMC meets the availability and capacity test targets.

Back in 2008, there were three utility deals in Singapore as Temasek sold Tuas Power, Senoko Power and PowerSeraya for $4.2 billion, $4 billion and $3.8 billion respectively. Based on their output capacity, this implies a cost of $1.6 million per MW, $1.2 million per MW and $1.2 million per MW respectively.

While the KMC deal seems to be the on lower end of the comparative range, the deal will only pan out if the plant is able to hit the targets. However, some downtime due to repairs, improvements and unplanned stoppages is inevitable and this may have a negative impact on the fee received.

Institutional Interest Could Be Piqued

Based on CIT’s and KIT’s closing prices of $0.54 and $1.07 on 28 November, their respective market values are $820.2 million and $673.9 million. These figures are below the psychological cut-off of US$1 billion in market value to attract institutional investors.

Additionally, large investors are concerned with the liquidity of the equities. CIT’s average daily market value traded for the past three months was $0.8 million while KIT came in at $0.4 million.

Following the share swap transaction, the combined entity will boast about 2.8 billion shares. Coupled with a successful acquisition a 51 percent stake in KMC, the total market value is about $2 billion. This could attract institutional players looking to enter Singapore’s infrastructure space.

SI Research Takeaway

All said, an exposure to Singapore’s infrastructure industry with a potential lift in trading liquidity could help attract both retail and institutional investors. However, one might wish to look at the potential acquisition pipeline for hints on assets growth.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

Keppel Infrastructure Trust  0.525 -- --   
Business: Co is the largest Singapore infrastructure-focused business trust, with a diversified portfolio of core infrastructure assets, spanning waste management, water and wastewater infrastructure, power generation, telecoms infrastructure.

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