VARIOUS options were exhausted before the proposal to restructure Singapore Press Holdings' (SPH) media business was made, SPH' s chief executive Ng Yat Chung has said.

 

Speaking at a virtual dialogue organised by Sias, or the Securities Investors Association (Singapore) to address shareholder queries on Thursday evening, he said that options such as privatisation or selling the media business had indeed been considered.

 

However, any party that takes over the media business will be subject to the same challenges the company is facing in the media landscape, particularly the secular decline in print advertising revenue. Being in a commercial company whose shareholders expect a fair return was therefore not viable for the media business, said Mr Ng.

 

Transferring the entire media-related business to a company limited by guarantee, or CLG, will allow profits to be reinvested in the company rather than being distributed to shareholders.

 

" So this is how we came to a solution that requires us to find a sustainable future for the media business," he said. He added that the CLG model will present more opportunities for the business to raise funds.

 

SPH, which publishes The Business Times, had announced in May that it will transfer its entire media-related business to a CLG. The move was the result of a strategic review announced in March, amid structural changes that had severely disrupted the traditional business model, which had relied on print advertising revenue.

 

With the loss-making media business hived off, SPH is expected to benefit from its non-media assets, prompting queries as to why a " profitable business" should be handed over to Keppel Corporation.

 

Keppel had made a S$2.2 billion bid to privatise SPH' s non-media business. The deal, which values SPH at S$3.4 billion, will take place through a scheme of arrangement, subject to SPH shareholders first approving its media restructuring plan.

 

Under the scheme, SPH shareholders will receive a total consideration of S$2.099 for each SPH share they own. This will consist of cash of S$0.668, 0.596 Keppel real estate investment trust (Reit) unit (valued at S$0.715) and 0.782 SPH Reit unit (valued at S$0.716).

 

Mr Ng said that while there is a plan to grow the non-media business on its own, the company had gone through the process of evaluating over 20 offers for its non-media business in order to get the best value for shareholders.

 

Addressing queries on Keppel' s offer, Mr Ng said that while he understands that an all-cash offer may be favoured, none of the offerors had proposed such a deal.

 

SPH had said that the offer price of $2.099 per share represents a premium of about 40 per cent based on the last trading price before the announcement of SPH' s strategic review on March 30.

 

Shareholders will also get to benefit from steady dividend yields in the 4 per cent range, based on the historical averages, for SPH Reit and Keppel Reit.

 

SPH will hold a virtual extraordinary general meeting at 2.30 pm on Sept 10 to seek shareholders' approval on its proposed restructuring and formation of a new constitution.

Keppel' s Vision 2030 will drive its long-term strategy and transformation the SPH deal has made that vision bigger and bolder

 

WHEN Keppel Corp made the S$2.2 billion offer to take over Singapore Press Holdings' (SPH) non-media assets, I should have seen it coming. I covered both companies as an analyst during their transformational years and should have intimate knowledge of their increasingly complementary businesses.

 

I started analysing Keppel back in the year 2000, when then-chief executive Lim Chee Onn was busy consolidating its myriad businesses after taking over from the legendary Sim Kee Boon. From as many as eight listed companies under the group, it quickly reduced to three in fewer than two years as sprawling conglomerates went out of favour.

 

My SPH coverage was almost a decade later - when it was in the midst of diversifying away from its media business, notably into property.

 

Both companies are familiar bedfellows, having been joint shareholders of telco M1, the manager of SGX-listed Prime US Reit, as well as a data centre. They even shared a chairman in Lee Boon Yang for over 10 years. Dr Lee stepped down from Keppel' s board this April.

 

For the Keppel-SPH combination to go through, shareholders will need to vote at an extraordinary general meeting slated to take place at the end of the year. Before that, they have to vote on the proposal to hive off the media business on Sept 10.

 

I know some long-suffering SPH shareholders who feel they got the short end of the stick. But investors have to grapple with the fact that these are very different times.

 

Back then, the ads from the bellwether The Straits Times Classifieds were an inch thick. Now, the papers struggle to fill up a few pages as online ads have been robbing market share. Indeed, the decline of the media business has been fast and furious over the past five years. It is thus unrealistic to think that SPH will be able to return to its heyday. If SPH had not announced the restructuring exercise, the share price would not have reached anywhere near the current levels.

 

Once the media is out of the way, the path is paved for Keppel to take over the rest of the SPH business and privatise it. There were over 20 offers made for SPH. While I am not sure about the competing prices, I believe none would come close to Keppel' s offer in terms of synergies.

 

To recap, Keppel will be valuing SPH' s non-media business at S$2.099 per share. For every 1,000 SPH shares, shareholders will receive S$668 in cash, 596 Keppel Reit units, and 782 SPH Reit units. The cash component makes up less than a third of the offer, while the two Reits make up the lion' s share.

 

Following the exercise, mall owner SPH Reit looks to have a number of catalysts: the potential injection of Keppel' s i12 Katong mall, a larger free float that could allow it to be included in a major real estate investment trust (Reit) index, and a merger with office landlord Keppel Reit. A merger would create the third-largest integrated commercial Reit listed on the Singapore Exchange with a market capitalisation of S$6.9 billion, potentially attracting more liquidity.

 

Keppel' s chief executive officer Loh Chin Hua has said that Keppel will be " supportive of both SPH Reit and Keppel Reit' s strategic discussion" to create value, " including potentially creating a more synergistic integrated platform" .

 

Potential spin-offs

 

A merger of Keppel Reit and SPH Reit would have an impact on Keppel' s share price. But these are not the only corporate actions to look forward to. There will be a few potential spin-offs.

 

The most immediate one should be the listing of SPH' s purpose-built student accommodation (PBSA) portfolio. In September 2018, SPH made its maiden purchase in the United Kingdom with some 3,400 beds. The portfolio has since more than doubled to 7,700 beds, worth S$1.43 billion. Earlier in the year, SPH mentioned that this business was ready to be injected into a Reit.

 

Senior living assets could also be spun off. SPH owns Orange Valley while Keppel acquired a 50 per cent stake in United States' senior housing operator Watermark Retirement Communities via Keppel Capital Senior Living.

 

Keppel can also do a " CapitaLand" . Earlier this year in March, the latter announced plans to privatise its development arm, whose revenue is lumpy in nature, and list its real estate investment manager. The recent sale of Ara Asset Management to ESR Cayman for US$5.2 billion, or an enterprise value of 20 times' earnints before interest, taxes, depreciation and amortisation, set a lofty benchmark for CapitaLand, as well as Keppel Capital if it intends to list its real estate investment manager.

 

Formed in 2016 to house Keppel' s asset management business, Keppel Capital has grown its assets under management (AUM) to S$37 billion, as at end-2020, with a diversified portfolio that includes real estate, infrastructure and data centre assets. Including SPH' s existing businesses, Keppel Capital' s AUM would rise 27 per cent to S$47 billion.

 

As a rookie analyst, I initiated coverage on Keppel with a " buy" recommendation. Twenty-one years later, many of the factors driving that call are still in play. Keppel announced its Vision 2030 last year to drive its long-term strategy and transformation, focusing on four key business areas: energy and environment, urban development, connectivity and asset management.

 

The SPH deal just made the vision bigger and bolder.

 

FOLLOWING a financial analysis, Singapore Press Holdings' (SPH) appointed independent financial adviser has advised the company' s directors to recommend that shareholders vote in favour of the proposed restructuring of its media business.

 

The independent financial adviser, Evercore Asia (Singapore), said in a letter to the board of directors that the restructuring will prevent the company and its shareholders from incurring potentially significant and recurring losses of the media business.

 

It added that the move will allow SPH (SPH: T39 +0.53%) to " set a clear strategic direction" with a focus on the real estate sector and related segments of student accommodation and aged care while eliminating the risks and uncertainties associated with the media business.

 

In addition, with the lifting of the Newspaper and Printing Presses Act (NPPA) once the media business is hived off, there will be opportunities for shareholders or investors to own more than 5 per cent of shares in the company, which will expand its strategic options.

 

Under the NPPA, no person shall, without the approval of the Ministry of Communications and Information, become a substantial shareholder of SPH, nor enter any agreement or arrangement to act with any other person with respect to the acquisition, holding or the exercise of rights in relation to more than 5 per cent of the company' s shares.

 

SPH, which publishes The Business Times, had announced in May that it will be transferring its entire media-related business to a company limited by guarantee, or CLG - a move that comes as part of a strategic review announced in March.

 

The move comes as structural changes in the media and advertising industries amid a digital era have severely disrupted the traditional business model that relied on print advertising revenue.

 

" Whilst the company has succeeded in increasing digital circulation, monetisation is increasingly challenging as competition for digital revenue has intensified and the company' s media business now competes with much larger players," said Evercore, adding that digital subscription and digital advertising have not been able to make up for declines in print.

 

SPH' s media segment' s operating revenue fell 50.7 per cent between FY2015 and FY2020, largely due to decline in print advertising and print subscription revenue.

 

Over the same period of time, earnings before interest, taxes, depreciation, and amortisation (Ebitda) of the media segment declined 91.8 per cent or at a compounded annual rate of 39.4 per cent, from S$299.1 million to S$24.5 million, which is inclusive of S$28.1 million from the Jobs Support Scheme grant.

 

With the media business weighing on the company' s overall performance, recurring earnings fell 77.7 per cent from S$316.2 million to S$70.7 million from FY2015 to FY2020.

 

The decline in the media segment' s profitability has also directly impacted the company' s ability to pay dividends, and in turn negatively affected the company' s share price, said Evercore. SPH' s share price had dropped 56.1 per cent from Aug 31, 2015 to Aug 11, 2021.

 

Based on historical financial data and estimates, Evercore is projecting SPH' s FY2024 operating loss to range between S$85.6 million and S$109.8 million. The corresponding simulated FY2024 losses at the Ebitda level would range between S$59.4 million and S$83.6 million.

 

Funding the media business through internally-generated cash flows is also not a viable option given that this will deplete resources for investments into areas of growth and eat into shareholders' dividends, according to Evercore.

 

SPH will hold a virtual extraordinary general meeting at 2:30pm on Sept 10 to seek shareholders' approval on its proposed restructuring and formation of a new constitution.