Ascott Holders Should Take The Money And Exit

Source : The Business Times, January 10, 2008

EARLIER this week, property giant CapitaLand announced that it would make a g eneral offer for its listed subsidiary Ascott Group, offering to buy all Ascott shares it does not own.

For Ascott's minority shareholders weighing up th e offer, there are several factors to consider. Their stock is now seeing poor liquidity and low trading volumes. The company is 66.5 per cent owned by CapitaLand and is tightly held by various institutions. Ascott's low trading volume - estimated a t less than US$2 million a day on average - has been an issue with some institutions that ar e interested in the company's growth story, analysts have pointed out.

Th e offer price of $1.73 a share is decent. The price is 43 per cent higher than A scott's last traded price of $1.21 at the time of the offer and also represents a premium of about 145 per cent to Ascott's unaudited net asset value per share as at Sept 30 , 2007.

While the offer is nowhere near Ascott's one-year high of $2.06 seen in May last year as well as below the target prices assigned to the stock by analysts, Ascott's share price is unlikely to appreciate much in 2008 in view of the uncer tain market.

Said CIMB analyst Khoo Chen Hsung: 'While we expect Ascott' s share price to rise towards our target price of $2.25, rising equity market risk aversion is likely to limit its ascent to our sum-of-parts valuation of $2.25 over the next 12 months.'

Better offer is unlikely

And if this bid fails , a better offer from CapitaLand is unlikely to be forthcoming. Similarly, it is also unlik ely that a competing bidder will emerge in view of the credit market turmoil.

With all this in mind, Ascott's minority shareholders should take the money and exit a company that has little going for them. After all, those keen on an exposure to Ascott's business model can instead buy into CapitaLand or Ascott's listed Asco tt Residence Trust (ART).

The market view seems to be that the offer will go through. UBS Investment Research, for example, said that shareholders will accept the off er.

'Given the fragmented shareholding and volatile market outlook, we t hink the probability of investors rejecting the bid and a higher offer is low,' said the research unit in a recent note.

On CapitaLand's side, shareholders might be a bit concerned about the premium the developer will be forking out for Ascot t's shares. CapitaLand's investment could hit $990 million - not a small amount by any reckoning.

Dilutive for pro forma earnings

The purchase wi ll also be slightly dilutive for pro forma earnings and net tangible assets, and only mildly positive for revalued net asset value.

But a lot will depend on how well CapitaLand extracts value from a delisted Ascott.

The group has indicate d that it will manage a wholly-owned Ascott in a more integrated fashion than it is currently doing, which might allow the service residence unit to grow at a f aster pace.

The timing of the privatisation bid also shows that CapitaLand is s tarting to give more attention to extracting value from its listed vehicles give n the weak equity market conditions. The move is timely, as property stocks - in cluding CapitaLand - have taken a knock over the past few weeks.

However, the dev eloper is unlikely to follow the same path with its other listed units, especial ly its real estate investment trusts (Reits).

CapitaLand is committed to its Reit strategy, and chief executive Liew Mun Leong has said that the group could well have 10 Reits in its portfolio in the long term.

In line with this, ART should remain the main listed Asian service apartment vehicle for CapitaLand. An d following the same argument, one should not expect offers by CapitaLand for its other list ed Reit associates like CapitaMall Trust and CapitaCommercial Trust.