F&N Business Review Has Keppel Echoes

Source : The Business Times, July 3, 2008

FRASER & Neave's (F&N) strategic review has a precedence. At the start of the decade, Keppel Corp, another blue chip conglomerate, also set out to define what its core business should be. Keppel got it right, and at the right time too. The jury on F&N, though, is still out.

F&N's announcement of a new management structure this week has, in the minds of market watchers, set the stage for a major restructuring of the group. F&N announced on Monday that it will not appoint a group CEO, despite an eight-month search. Instead, the three CEOs of its food and beverage (F&B), property, and printing and publishing businesses will report to the board through the chairman's office. The group also engaged Morgan Stanley to assist in reviewing strategic options for its publishing and printing business, while making note of the two core contributors to its profits, properties and F&B.

That, along with the decentralised management structure, is being read by many that a break-up of F&N's businesses may be in the works.

In this context, recalling the Keppel experience may be instructive. In January 2000, Lim Chee Onn, then a Keppel veteran of 16 years, took the helm of the group from Sim Kee Boon as executive chairman. Soon after he took over, he told investors that Keppel would review its operations and find a new core business. That set the market buzzing with anticipation. With Keppel Capital and M1 already sold, market players speculated on the potential divestment of Keppel's other holdings like Keppel Land and Singapore Petroleum Corp (SPC).

In the end, after two years of review, Keppel announced that it would essentially stay the way it was: its core businesses would be ship-repair and oil-rig construction, property, engineering and utilities. It also decided to hold on to a substantive stake in SPC.

Keppel received some stick for deciding to stay un-reformed, not helped by the fact that the market had talked itself into believing a big divestment play was in the offing. But it proved to be the correct decision. Keppel went on to benefit from the energy and oil rig boom, as well as the sharp rebound in the property market. Even its less headline-grabbing engineering business is poised now to benefit from the growing emphasis on environmental engineering and water solutions.

Now, it has come to F&N to decide on how it should move forward. The smart money thinks that the business should be broken up. The publishing and printing business, and to a lesser extent, the F&B operations, are seen as a drag on the property business, which is the biggest contributor to group profits. On paper, that may be true. But that may not take into account certain realities.

For one, just how attractive are F&N's assets if they are to be hived off? The publishing and printing business is not a high growth operation. If it is to be sold, valuations may have to be kept down to draw buyers. The F&B business is attractive in parts. While F&N's stake in Asia Pacific Breweries will likely draw bids, not least from Heineken which already has a 32.5 per cent stake, its other F&B operations may not command such a premium. So valuations, especially amid an uncertain and volatile market environment, will be a big sway factor.

Keppel, in fact, held more attractive assets. One reason why it decided to keep it all together is often overlooked. Rig-building is a cyclical business, and so is property, while the engineering and utilities business has its own beat. But the cycles are not the same. Before the property rebound, it was the rig business which drove Keppel forward. The property cycle may be peaking now, but the engineering and utilities business is set to take off. It is this overlay of cycles that remains a key draw of the conglomerate structure.

At a time when the property market is facing a period of uncertainty and correction, should F&N be so ready to divest its other businesses? Publishing and printing and F&B are defensive in nature - a good foil in fact to the highly cyclical nature of property. Instead of divesting them, arguments can be made for F&N to invest more and to beef up these non-property operations.

However it looks on paper, market conditions and realities will ultimately drive F&N's decision. Keppel decided after a long debate to stay a conglomerate, a decision which set the stage for several years of record profits. It's F&N time now to make the right decision.