The rumours of this potential merger picked up last November, and from the perspective of Adrian Loh of UOB Kay Hian, "there's no smoke without fire".
"The simple rationale for such an action for the two Temasek-linked companies is that of a search for scale in the property and REITs sector as well as a re-rating for CLI," says Loh.
The two companies have significant overlaps in both asset types and some markets. "Thus at the Temasek level, it makes sense – as previously done for Keppel Offshore Marine and Seatrium – to merge the two large companies to form an even larger, and hopefully more compelling, company," says Loh.
On Mapletree's side, it has historically been an "asset gatherer" with acquisitions globally in logistics and office, for example.
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"However, markets have pivoted in recent years towards favouring asset-light fee-based earnings and not balance-sheet scale, especially as high interest rates in the post-Covid-19 years punished income statements," says Loh.
He further notes that "public and private sentiment towards Mapletree's investments have not been helped" by soured transactions such as the sale of Melbourne office at a loss of $80 million, or around 38% lower than what it paid for back in 2017.
Due to the mix of assets, ownership structure, and listed REITs, there are numerous permutations for CLI and Mapletree's coming together, but according to Loh's analysis, he believes that a merger at the "platform" level - in other words, a corporate "re-organisation" directed by Temasek, as the "best method".
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"It preserves listed vehicle minority protections both at the CLI shareholder level as well as with REIT unitholders, minimises property transfer taxes as the ‘movement’ is from shares and not assets, and it rationalises manager platforms," reasons Loh.
CLI, by avoiding direct ownership in property, large development landbanks and long-dated principal investments, the platform-only merger preserves its "asset-light" narrative, given that it is not burdened by heavy assets on its balance sheet.
Upon completion of this transaction will see CLI guiding for a higher percentage of group earnings from fee income-related business and performance fees, lower earnings cyclicality and higher incremental ROE on growth capital.
In his view, this methodology would necessarily see CLI generate higher FRE EBITDA, and thus a higher proportion of its earnings coming from FRE, and should re-rate CLI towards its asset management peers, which Loh says is Temasek's ultimate aim.
According to Loh's analysis, there are three other ways to combine CLI and Mapletree.
First, at the holding company level, where CLI issues new shares to Temasek for all of Mapletree's assets, which will result in the latter becoming a unit of CLI.
However, CLI minority shareholders would need to ok this deal and the parties involved have to produce independent valuations and fairness opinions.
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By foisting the assets of Mapletree on to CLI, this will "dilute" its asset-light, fee-related earnings story that has been in place since the former Capitaland split into CLI and the privately-held Capitaland Development.
Next, under a REIT-by-REIT consolidation, CLI's REITs will merge with comparable Mapletree REITs. Under this scenario, Mapletree remains a distinct entity but there will be a series of unitholders' approvals sought on both sides, and also related-party transaction governance.
According to Loh, yet another method is to do an asset swap and a strategic joint venture. Under this method CLI contributes CLI contributes selected mature income assets, such as its those in logistics, business parks, data centres and living sector, but retains its general partner identity.
Mapletree, meanwhile, contributes selected assets where CLI is stronger, such as logistics or student accommodation, and it will retain control of its flagship/core assets and domestic pipeline, says Loh.
However, risks include governance issues, such as, who is the "real" general partner, who controls capital allocation, and also, limited fee-related income earnings and also causing investors' perception that this vehicle is only used to park mature assets, says Loh.
