Keppel shares fall after M1 and Keppel T&T bids as market eyes possible bidding battle

Shares of Keppel Corp. were down 1.82 percent at S$7.03 at 15:05 SGT on Friday, likely in part due to a usually “acquirer knockdown” after its bids for Keppel Telecommunications & Transportation and M1.

CGS-CIMB said it expected short-term pressure on Keppel’s share price to persist, partly on the perception that buying a telco is dilutive and amid the intensifying competition in the telco space with TPG Telecom’s entrance into Singapore’s market by the end of the year.

“Keppel’s share price may be under pressure until completion of the transactions in the first quarter of 2019,” it said in a note on Thursday.

When it comes to the M1 offer, “the objective is to gain control and digitally transform M1’s operations to create synergy with Keppel’s business in data center, connectivity, smart nations initiatives and urbanisation strategy,” CGS-CIMB said. “We trust that management has a game plan in mind and not merely buying a telco.”

But it added, it expected any transformation plan for M1 would take a few years to materialize.

Keppel Corp. and SPH on Thursday said they would use a special purpose vehicle called Konnectivity, to make an offer for all of M1 at S$2.06 a share. The offer price was a premium of 26 percent to the last traded price of S$1.63 on Friday of last week. M1 shares were halted before the market open on Monday before resuming trade on Friday.

Konnectivity has a deemed interest of 33.27 percent of M1, it noted, with Keppel Telecommunications & Transportation, which is 79 percent owned by Keppel, owning 19.2 percent, while SPH has a 13.45 percent stake held via wholly owned subsidiary SPH Multimedia. Axiata has an around 28.7 percent stake.

In a separate deal, Keppel proposed taking Keppel T&T private at S$1.91 a share, it said in a filing to SGX on Thursday. The stock last traded at S$1.36 on Friday of last week before being halted, indicating a 40 percent premium in the offer price.

CGS-CIMB estimated that Keppel’s gearing would go up to 0.6 times in 2019 if it acquires all of M1 and Keppel T&T, up from gearing of 0.4 times in the first half of 2018. If Keppel acquires all of M1, it would add around S$39 million in net profit, or 4 percent, for Keppel in 2019, CGS-CIMB estimated.

It kept Keppel at Add, “on a longer-term basis and a leap of faith on management’s transformation plan post completion,” it said, leaving its target price at S$8.82.

Separately, Daiwa had some notes of caution about Keppel’s M1 bid.

“We remain wary of high synergistic expectations from the integration/restructuring of M1 with Keppel’s businesses, as well as the company engaging in a bidding war with Axiata,” Daiwa said. In a separate analyst note, Daiwa said it expected that a higher bid for M1 might come from Axiata.

But Daiwa said the offer for Keppel T&T wasn’t a surprise and it viewed it as a positive for both Keppel and Keppel T&T in the medium term as it would restructure Keppel T&T’s asset base. But it noted that short-term earnings accretion from the Keppel T&T deal would likely be marginal at best.

Daiwa kept a Buy call on Keppel Corp. shares, but nudged up its target price to S$8.71 from S$8.70 on a higher fair value assumption for its Keppel T&T stake after the bid.

Shares of Keppel T&T surged 37.50 percent to S$1.87 by 15:06 SGT, just shy of the S$1.91 offer price.

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