Daiwa: Keppel-SPH deal may spur another REIT merger

Four of the properties in SPH REIT -- Paragon mall, Clementi Mall, The Rail Mall and Figtree Grove Shopping Centre. Image credit: SPH REITFour of the properties in SPH REIT -- Paragon mall, Clementi Mall, The Rail Mall and Figtree Grove Shopping Centre. Image credit: SPH REIT

Correction: A previous version of this article had an incorrect figure for the cash portion of Keppel’s offer to acquire SPH. The cash consideration portion of the offer is S$0.668 a share. 

Keppel Corp.’s bid to acquire Singapore Press Holdings (SPH) has put another merger of Singapore REITs in sight, with Keppel REIT and SPH REIT likely to seriously consider a deal, Daiwa said in a research note Monday.

In a surprise announcement Monday, Keppel proposed acquiring SPH for S$2.24 billion, with a plan to delist and take the company private after carving out its media assets. For every SPH share held, SPH shareholders will receive S$0.668 in cash and 0.596 Keppel REIT unit, as well as 0.782 SPH REIT unit.

After the deal is completed, Keppel would hold around 20 percent each in retail-focused SPH REIT and office pure-play Keppel REIT.

Daiwa noted the most immediate impact of the deal would be to “considerably improve” the free floats of the two REITs, with Keppel REIT’s free float rising to 80 percent form 54 percent and SPH REIT’s going to 80 percent from 35 percent.

In the media and analyst briefing Monday, Loh Chin Hua, CEO of Keppel, said that the company may use the deal as an avenue to monetise its own retail property assets, such as the i12 Katong mall in Singapore, into SPH REIT.

Keppel ‘supportive’ of deal

When asked about the possibility of merging the two REITs, Loh said Keppel would be “supportive” of a deal.

“We remain supportive of the two REITs to look at how they can work more closely together, including potential synergistic ways of creating an integrated platform. But I just want to be very clear – these will be decisions that both Keppel REIT and SPH REIT will have to take on their own because they have their respective unitholders’ interests to look after,” Loh said according to the transcript.

“It has to be decided by Keppel REIT and SPH REIT, which have their own independent boards to look after the interests of their own respective unitholders,” he added.

Daiwa said a deal would have “some fit” due to common developed-market exposures in Singapore and Australia.

“While the operational and portfolio synergies might not be apparent to us, the integrated (office and retail) nature of the exposure is now common among the large-cap commercial S-REITs,” Daiwa said. “Moreover, a merger would place the combined entity solidly as the third largest commercial REIT in Singapore by market cap.”

Daiwa cited a concern that Keppel REIT would lose its pure-play office status, but noted the office sector faces long-term uncertainty as the pandemic has spurred a shift to work-from-home.

The investment bank rates both SPH REIT and Keppel REIT at Outperform.

Keppel REIT units were down 4.17 percent at S$1.15 at 9:04 a.m. SGT, while SPH REIT units were down 3.28 percent at S$0.885.

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