International Business & Economy is not shortchanging SMRT's minority shareholders with its buyout plan

Temasek is not shortchanging SMRT’s minority shareholders with its buyout plan




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By: Chris Kuan

So Holdings pays $1.68 per share or $1.18b to buy out the minority shareholders of SMRT. The price is just a 9% premium over the last traded share price of $1.545.

The small premium is telling. Usually an acquirer pays a substantial premium of up to 30% to gain full control of the target company. So the question is why just a 9% premium? Temasek Holdings trying screw minority shareholder is it?

The answer is SMRT today isn’t the same SMRT before the $1b nationalisation of rolling stock and signals. The tender price of $1.68 should be seen as a 20-30% premium over a forecast share price substantially lower than the last traded price of $1.545. That is to say if Temasek did not plan to acquire all the remaining shares it did not own, the share price would have fallen.

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This reflects the lower profitability and hence lower enterprise value of SMRT under the New Rail Financing Framework. So yes minority shareholders still get a fat premium but from a lower forecast share price due to the change in enterprise value effected by the nationalisation and the NRFF (new rail financing framework).

Nevertheless I am sure somewhere someone in the local social media will be shouting “Thief! Thief!”

Here is another thing to consider: where do taxpayers stand in this outright acquisition of SMRT by Temasek?

The $1.68 tender price for the 46% shares that Temasek does own cost $1.18b. Assuming the price reflects a 30% takeover premium, then the price of SMRT shares forecast to have fallen after the nationalization of rolling stocks and signals and the implementation of the New Rail Financing Framework, should be about $1.29.

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At that price, the amount to be paid by Temasek should be $900m. Therefore the takeover premium cost Temasek $280m. Since Temasek is investing government funds given to it in cash or through IPOs of GLCs and through divestments of former GLCs, then one can say in a rather convoluted way, that the government is stuffed with the takeover premium. This in another convoluted way also means less returns from Temasek going into the budget for the government to spend on us, taxpayers.

Couple of things to note though. Without the takeover premium, it would not have been possible for Temasek to acquire the remaining shares. Besides this would not be the first or the last time that Temasek pays a premium. Actively seeking to take majority control, outright acquisition or even taking a large bloc of shares require paying a premium. That is what Temasek does.

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