City Developments Limited - OCBC Investment 2019-06-10: Could Second Time Be The Charm?


City Developments Limited - Could Second Time Be The Charm?

  • Takeover cash offer for M&C.
  • 685 pence per M&C share.
  • Potential Fair Value upside.

Launches cash offer for M&C at 685 pence per share

  • CITY DEVELOPMENTS LIMITED (SGX:C09) announced that it has launched a pre-conditional final cash offer for the remaining 34.8% stake in Millennium & Copthorne Hotels Plc (M&C) which it does not own. The offer price comes in at 685 pence per share, which City Dev highlighted is final and will not be increased. This represents a premium of 37.0% to M&C’s closing price before the announcement and is also 10.5% higher than the previous cash offer of 620 pence per share (including a special DPS of 20 pence).
  • That offer was made on 21 Dec 2017 and lapsed on 26 Jan 2018 as City Dev could not satisfy the minimum acceptance condition.

Conditions have changed since last offer

  • We believe conditions have changed since that fateful last offer. M&C’s operations have continued to be fraught with challenges.
  • Furthermore, City Dev has managed to secure irrevocable undertakings from a number of key minority shareholders such as JNE Partners LLP, MSD Capital, L.P., International Value Advisers, LLC, Classic Fund Management AG and BWM AG to accept the final offer. These shareholders own ~43.6% of the M&C shares not already owned by City Dev.
  • Besides regulatory approvals, this final offer is also conditional, amongst other things, on City Dev securing valid acceptances of more than 50% of the M&C issued share capital not already owned by City Dev. M&C’s independent directors have also stated that the terms of the offer are fair and reasonable, and intend unanimously to recommend that M&C shareholders accept the offer.
  • The maximum cash consideration payable by City Dev amounts to GBP776.3m (~S$1.34b) and will be funded via internal cash resources and debt.

Potential upside to our fair value

  • Based on our RNAV methodology on City Dev, M&C is currently valued based on its market value (i.e. trading share price). Thus, we see potential upside to our fair value estimate of City Dev should the privatisation exercise be successful and our valuation of M&C is based on its book value instead (takeover offer price of 685 pence per share translates into a P/B ratio of 0.82x based on 1Q19 financials).
  • Pending the outcome of this development, we keep our fair value estimate of S$10.68 on City Dev.

Wong Teck Ching Andy CFA OCBC Investment Research | https://www.iocbc.com/ 2019-06-10
SGX Stock Analyst Report BUY MAINTAIN BUY 10.680 SAME 10.680