Mergers spice up the property sector,benefits for buyers

By TEE LIN SAY linsay@thestar.com.my

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THE property sector has not witnessed more invigorating times than that seen in recent weeks, with the spate of mergers that promises to build large companies with huge market value and even larger land banks.

Starting the siren of mergers in the sector were UEM Land Bhd and Sunrise Bhd, to be followed by Malaysian Resources Corp Bhd and IJM Land Bhd, and Sunrise City Bhd and Sunway Holdings Bhd. The latter two were announced just over the week.

These will result in the creation of three property companies with over US$1bil in market capitalisation each.

In fact, the merged entities of UEM Land-Sunrise (RM9.8bil) and IJM Land-MRCB (RM7.2bil) will have higher capitalisations then property bellwhether SP Setia Bhd (RM5.2bil).

Why the deluge of M&A activities in the sector? Analysts attribute it to a combination of reasons, .

In the cases of Sunrise-UEM Land and MRCB-IJM Land, it is hoped that through these mergers, the government-linked companies (GLCs) can move forward to stamp their mark as regional champions.

What better way is there then to merge with companies which have strong branding, sound delivery and impressive track record? asks an observer.

A Light Rail Transit train passes a construction site in Kuala Lumpur. Potential takeover targets are companies with large land bank in KL. — AFP

 

Another reason for the current consolidation could be players trying to get a bigger slice of land redevelopment projects created by the proposed mass rapid transit (MRT) system.

CIMB research head Terence Wong says the mergers between the GLCs and private companies show that there is a significant push for execution and performance.

From my conversations with property developers over the last two weeks, I have the impression that there is now a greater urgency for M&As. The formation of two large companies from the mergers of UEM Land-Sunrise and IJM Land-MRCB would pose a threat to other smaller companies in that the former will have more resources and liquidity, says Wong.

Terence Wong ... ‘The formation of large companies would post a threat to other smaller companies.’

 

Another benefit for these entities which on a stand-alone basis were not too appealing to foreign investors given their size (or lack of it), would post-merger have the economies of scale to draw these investors' attention, says Prudential Fund Management Bhd fund manager Lee Hwa Seng.

The bigger size of these companies will make them more investable to foreign investors. These companies will now be able to compete with their regional counterparts, he says.

Indeed, as MIDF-Amanah CEO Scott Lim says, Malaysian corporates are entering an interesting phase in the market. For the first time, GLCs are actively looking for expertise from the private sector to ready themselves for the next phase of development.

In Malaysia, all major land banks are government-owned. The reason why private sector companies such as Sunrise and IJM Land are roped in, is because they have the branding and expertise. Hence, what you're seeing now is not just the making of bigger companies, but stronger ones, says Lim.

Lee concurs: If a property company has a good track record but is a small player, it may not be good enough as the company does not have the balance sheet to acquire landbank. On the other hand, what the GLCs may lack in expertise or branding, they make up in landbank and government funds. So the public-private partnership is a formula that should work.

Buy land vs companies

HwangDBS Research analyst Yee Mei Hui makes an interesting point. She says it makes sense for GLCs to buy over property companies rather than land as valuations of these companies are still relatively attractive, whereas land prices have appreciated significantly.

Driving home this point is the fact that property counters are trading at an average of 35% discount to their net asset value (NAV). In fact, most of them are also trading at a discount to their net tangible asset.

Almost all property companies that merge can break up their assets and unlock more value out of their existing land bank, says Wong.

Also over the week, YTL Corp Bhd announced a revamp of its property operations under a proposal to inject all its property development assets and projects into YTL Land & Development Bhd. Yee expects the deal to transform YTL Land from an urban renewal developer in Sentul and Sg Besi to a prime city centre developer in Kuala Lumpur and Singapore.

(YTL Corp has proposed to inject its wholly-owned YTL Westwood Properties Pte Ltd, which owns a parcel of development land at Orchard Boulevard, Singapore and its 70%-owned Lakefront Pte Ltd which owns 13 pieces of land at Sentosa Cove Singapore into YTL Land.)

In Kuala Lumpur, YTL Land owns land in the Kuala Lumpur City Centre, Jalan Bukit Bintang, Jalan U-Thant and Brickfields, which is next to KL Sentral.

So, who's next?

There is expectation that the spate of recent proposed mergers will unleash another slew of merger activities among other industry players to avoid being left behind in the race to be bigger and better. Potential targets, says an analyst, could be those with large prime land bank in Kuala Lumpur with shareholders that hold concentrated stakes. Those who fit these descriptions include Sime Darby Bhd, SP Setia Bhd and other property companies owned by Permodalan Nasional Bhd (PNB).

Lim expect the M&A phase to accelerate over the next few months.

Presently, PNB is the major shareholder of SP Setia with a 32.9% stake. PNB also owns unlisted property assets I&P Bhd, Petaling Garden Bhd and Pelangi Bhd as well as Sime Darby Property Bhd via its 52% stake in Sime Darby. PNB also has a 22% stake in Mah Sing Bhd.

Currently, Sime Darby has one of the largest landbanks in the country. Its subsidiary Sime Darby Property Bhd owns 3,653 ha of development properties in Selangor and Kuala Lumpur. It also has 5,022 ha of development properties in Australia and China.

A merger between Sime Properties and SP Setia will see an even bigger creation than what we've seen so far, says Lim.

As activity heats up in the sector, the guessing game on who will buy who, no doubt, is set to continue.

Property buyers can benefit from M&As

THE REAL ESTATE By ANGIE NG


PROPERTY buyers can hopefully look forward to wider choices, more innovative and quality property products to choose from if the spate of mergers and acquisitions (M&As) involving property companies translate into integration of skills, resources and innovation among industry players.

With more Malaysians turning to property investment these days, it will be welcomed by property buyers if these M&As promote the coming together and fusion of talents and capabilities among industry peers to bring to the market more well-planned and quality projects.

I believe one of the main factors for the sudden urge for developers to want to become part of a bigger entity is the fact that the Federal Government is opening up a number of its prized land bank around Kuala Lumpur and the Klang Valley for redevelopment.

Among the government-owned prime land in Kuala Lumpur and other parts of the Klang Valley are the 50 acres at Jalan Cochrane; 20-30 acres in Ampang Hilir (near KL city centre); and the 3,300 acres of Rubber Research Institute land in Sungai Buloh. Others comprise smaller parcels in Jalan Stonor, Brickfields, and Bukit Ledang (off Jalan Duta).

Notwithstanding the intense competition for the rights to develop these government-owned land, it is important to ensure optimum benefits for the people and country by upholding the utmost transparency through open tenders in the award of the land for development.

For both the public and industry players, the redevelopment of these land offers a huge opportunity to turn around and inject more vibrancy into the city's property landscape. Most importantly, all the attributes should be in place for Kuala Lumpur to be accepted into the list as one of the most livable metropolis in the world.

Kuala Lumpur and the Greater Klang Valley can certainly do with an efficient and well integrated public transportation system; a clean, green and safe environment; and a lively cultural and performing arts scene which are among the missing links in the city today.

The project planning should not be motivated just by profits, but should be demand-driven, and add value to the living, working and leisure environment.

It is imperative that a thorough and in-depth market study be conducted when drawing up the master plan for the redevelopment programme. In the planning and execution of these projects, input from the public, community groups and industry players should be sought and be given due consideration.

There is certainly a shortage of affordable landed housing (priced between RM200,000 and RM300,000) in the Klang Valley today and ensuring more such projects in the new development plans will be a timely gesture to ease the burden of the common folks.

If the implementation of the enlarged Kuala Lumpur master plan is done with best practices and attention to details, the people will be able to enjoy a more holistic and vibrant city. It will also be a boon to property values given the higher value perception bestowed on a Kuala Lumpur address.

With such massive development opportunities opening up, it is no wonder there is this sudden expansion frenzy among industry players.

Since UEM Land Holdings Bhd stated its intention to take over Sunrise Bhd earlier this month, two other mergers involving MRCB and IJM Land, and Sunway Holdings Bhd and Sunway City Bhd have been announced.

The first two mergers involve government-linked entities with private developers while the third involve two sister companies in the Sunway stable. It marks the creation of Malaysian property giants that have the heft and ambition to go regional, if not global.

The merger will boost their land bank, product offerings and expertise to enhance their market position.
With the growing competition, industry players see the need to strengthen their market capitalisation, land bank, geographical presence and expertise.

The marriages of these companies will allow the involved partners to leverage on each other's strengths and ensure better utilisation of resources. They will also create a bigger vehicle with a stronger balance sheet and market capitalisation to undertake bigger projects.

With their enlarged capacities and capabilities, there are better chances of winning bids for larger projects. Of course, all eyes are on the redevelopment of the massive Rubber Research Institute land in Sungai Buloh.

Besides flexing their muscles locally, developers are also seeing the need to venture offshore as the home market, while still robust, has a limit to its growth potential.

Globalisation is taking on a new vigour and there are opportunities for local developers to spread their wings to become international players.

Having a good brand and stronger financial backing and expertise are some of the prerequisites to carve a niche in the international market place.

While there are merits to being big, let's not forget that many conglomerates have failed after they grew too big and clumsy. Most of the time, these gigantic organisations lost track of their business forte and started to diversify into too many non-related activities. So it is important for them to keep level headed and not become arrogant and lose their footing in the process.

Despite the frenzy to go BIG, there is certainly room for the smaller and medium-sized developers which are appreciated for their quality projects, timely delivery and good after-sales service.

Deputy news editor Angie Ng believes industry players who uphold the basic tenet of appreciating and engaging with their customers will survive the good and bad times.

Apple buys old HP campus

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Hewlett-Packard has found a buyer for its decades-old campus at 19091 Pruneridge Avenue in Cupertino.
Apple.

About five minutes' drive from Apple headquarters, the 98-acre parcel of land is adjacent to 50 acres Apple acquired back in 2006 and will be used to house a workforce that's expanding nearly as quickly as the market for iOS devices.

"We now occupy 57 buildings in Cupertino and our campus is bursting at the seams," Apple spokesman Steve Dowling told the Mercury News, which first reported the story. "These offices will give us more space for our employees as we continue to grow."

No word on HP's asking price for the parcel, but real estate experts estimate that it may have been $300 million or more.

Story Copyright (c) 2010 AllThingsD. All rights reserved.

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When Is a Bubble Not a Bubble?

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The following article has been adapted from "Value: The Four Cornerstones of Corporate Finance" by McKinsey & Co.'s Tim Koller, Richard Dobbs and Bill Huyett. The publisher is John Wiley & Sons.

It's easy to construe all instances of sharply rising, then falling, stock prices as bubbles, but most of the time they're not.

True stock-price bubbles are essentially nonexistent at the level of the aggregate economy, very rare in specified industry sectors and not common for individual companies. The fact that they are so rare makes it all the more important for the value-minded executive to be able to spot them.

What, then, is a bubble? Bubbles occur when one group of investors irrationally pushes a stock price far above a level that can be justified by its potential financial performance, and other, often more sophisticated investors, aren't able to offset the actions of the less rational investors due to structural constraints and the liquidity risks of shorting stocks.

Financial crises are often described as bubbles, but they're not the same. Bubbles are the rise and fall of company share prices. An unlike debt, equities don't have maturity dates or covenants that can allow the holder to immediately demand cash from the company. Therefore, when bubbles burst, they don't have a drastic effect on the economy (unless they're accompanied by large amounts of debt).

Financial crises, on the other hand, do have a dramatic and far-reaching effect on the real economy, because they're brought about by excessive financial leverage, which has a negative domino effect when the value of the underlying assets falls and those who owe the debt can no longer service it. The debt crisis causes an economic downturn, which then causes the stock market to decline. But we can't call this a bubble if stock prices were reasonably valued in light of the economic conditions before the crisis.

A good example of a stock bubble was when 3Com(COMS_) spun off its Palm subsidiary 10 years ago. Immediately after the share sale, the market capitalization of Palm was $45 billion. At the same time, 3Com's market cap was only $28 billion, even though it owned 95% of Palm (presumably worth $41 billion). The only way that 3Com could be worth 60% of Palm would be if the rest of 3Com's businesses were worth negative $13 billion!

So why didn't rational investors exploit the mispricing by going short in Palm shares and long in 3Com shares? Because they couldn't. The free float of Palm shares was too small after the carve-out because 95% of all Palm's shares were still held by 3Com. Establishing a short position in Palm would have required borrowing the shares from a Palm shareholder, but there weren't many. Therefore, the bubble remained until the supply of shares available to borrow increased steadily over the months following the carve-out.


Bubbles that affect the broad market in developed economies are rare. Over the past 50 years in the U.S., two periods (1967-1972 and 1997-2001) might be considered market-wide bubbles. But as we dig deeper, we find that even these bubbles weren't broad based; they were concentrated in certain segments of the market.

During the technology bubble of the late 1990s, the aggregate S&P500 price-to-earnings ratio was greater than 30 times for several years versus an expected level of about 16 times (given the level of interest rates and inflation). Looking deeper, the bubble was concentrated in large-cap companies with high P/E ratios clustered in three sectors: technology, media, and telecommunications (known as TMT). P/E ratios were significantly lower in most other sectors.

One would expect rational investors to question the apparent mispricing -- and some did. Julian Robertson, one of the leading investors of the 1980s and 1990s, said: "Well, we've had a movement away from value investing to momentum investing, where price is not a factor ... everybody -- day traders, hedge fund operators, LBO people, right down the line -- is piling into the same stocks, which is, in effect, an inadvertent Ponzi scheme. And it will eventually blow up."

On the other hand, the media found commentators who could explain the high prices with new theories of economics and finance. One idea was the "new economy," although definitions of it were vague. But vagueness and hope drove herds of people into buying overpriced Internet stocks, so much so that those who questioned the new economy were said to "not get it." At this time, there weren't enough rational investors with the resources and risk appetite to prevent prices from rising too high.

Sector bubbles are more frequent than market-wide bubbles, but still rare. The biotechnology sector experienced a bubble between 2005 and 2006, when the sum of listed biotech companies' market capitalization was about $450 billion (excluding the traditional large pharmaceutical companies that were investing in biotech). Making some assumptions about future margins, one can estimate that these companies would need to earn $600 billion in revenues in 2025 (in 2006 dollars) to justify these prices. To put that into perspective, all the listed pharmaceutical companies combined earned about $600 billion of revenues in 2006.

Company-specific bubbles are hard to find too, and sometimes misnamed. Imagine a sharp share-price drop for a pharmaceutical company that announces its promising new drug has failed in clinical trials. The steep decline doesn't indicate that the price was originally at a bubble level; the original price might have reflected a reasonable estimate of the company's value given a reasonable estimate of the drug's probability for success.

Brinker International(EAT_), however, is an example of a company that experienced a bubble in the early 1990s. At that time, Brinker, which has 1,700 restaurants (including the Chili's chain) in 27 countries, increased its revenues by more than 20% per year, with improving margins. In 1993, its market capitalization reached $2.1 billion with a P/E ratio of greater than 40 times. But eventually same-store sales began to decline, and the market realized the company's economics were vulnerable. In 1994, Brinker's market cap dropped by 61% to a more reasonable P/E ratio in the high teens.

Although not common, the fact that bubbles do sometimes occur -- that is, prices do sometimes deviate from the fundamentals -- makes it even more important for corporate managers and investors to understand the true, intrinsic value of companies. They may be able to exploit any market deviations if and when they occur, for example, by using shares to pay for acquisitions when those shares are overvalued by the market. But more importantly, they will not make decisions based on what may be the unreasonably high price of their stocks, only to be surprised when those prices return to more normal levels, which they always do.

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