Spotlight on M&A - DBS Research 2019-07-02: Stronger Together

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MM2 ASIA LTD. (SGX:1B0)

Spotlight on M&A - Stronger Together

• Technology sector - Hi-P International, Fu Yu, Spindex, Sunningdale Tech could explore M&A in increasing challenging environment caused by the trade war.
• Mergers in industrial REITS’ space to grow AUM - AIMS APAC REIT, Cache Logistics Trust and Soilbuild REIT.
• SunMoon Food, Delfi, QAF are F&B stocks that could be sought after for their strong brand equity.
• Consolidation in healthcare to offer wider range of services, such as Singapore O&G, Asian Healthcare Specialists, ISEC Healthcare, Talkmed Group.
• mm2 Asia, Vicom, SBS Transit and United Engineers could optimise their structure to maximise returns.

M&A and privatisation back in focus

• The M&A and privatisation wave is gaining momentum. YTD, there were about 14 companies undergoing privatisation or in the process of being bought out. Based on data compiled by us, this number is much higher than that for the whole of last year, and is also higher than the deals done in 2017, when the M&A and privatisation angles were also in focus.
• We had issued a thematic report: “Spotlight on M&A – Stars align to strike” in March 2017, to ride on the M&A and privatisation wave. In that report, we had correctly predicted Courts Asia (SGX:RE2) under the brand value theme, and Nobel Design (SGX:547) and PCI Limited (SGX:P19), for their strong net cash positions, as potential targets.
• M&A/Privatisation premium offered is attractive. Based on data compiled, companies that were privatised or delisted in the last three years were transacted at an average premium of about 15% over their last transacted price before the deal was announced. This often presents an opportunity for shareholders to liquidate and realise their entire investment, often at a premium to the prevailing market price, an option which may not otherwise materialise.

Factors driving the M&A and privatisation wave

Limited necessity for access to equity capital markets; cost savings

• One of the benefits of obtaining a listing status is to tap the equity market for funding needs. Often, companies do not need to choose this path, thus defeating the purpose of staying listed.
• Furthermore, in maintaining a listed status, companies incur compliance and associated costs relating to listing requirements and regular disclosures. These resources could be channelled to their business operations instead.

Restructuring, streamline operations

• Often, acquirers could be part of the value chain of the products and services that the target company offers, or even a competitor. Thus, acquirers of the company may also wish to privatise a listed company in a bid to streamline operations or to restructure certain aspects of the business.

Management can focus on long term goals

• Privatisation gives the management more flexibility to manage the business of the company and optimise the use of management and resources. A private company can better focus on the business’ long-term competitive positioning, without having to worry about meeting shareholders’ short-term demands at the same time.

Potential Privatisation Candidates

• We screened our database for potential privatisation candidates based on the following criteria:
  1. Cash rich
  2. Low liquidity
  3. Major shareholders with > 50% stake in the company
• Coupled with specific drivers for different industries, we derived our list of potential M&A and privatisation targets by sectors. See
  • Spotlight on M&A - SGX Technology Sector & REITs
  • Spotlight on M&A - SGX Consumer & Healthcare Sector
  • Spotlight on M&A - SGX Spider Web Listing

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-07-02

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