During Keppel’s analyst and media briefing on Aug 11, questions swirled around the net loss that Keppel is likely to book once the sale of M1 to Simba completed. Keppel announced that it has agreed to divest M1 for an enterprise value of $1.43 billion with an implied FY2024 EV/Ebitda of 7.3x excluding the ICT business which has a book value of $300 million. The ICT business comprises – among other things – Keppel’s data centre business which includes its build and operate skills. Keppel is sponsor to Keppel DC REIT.
Keppel will receive $1 billion in cash proceeds for its 83.9% stake in M1. The businesses to be sold are M1 Shop, M1 Net, Antina and M1 Network. Keppel will retain the ICT business which includes M1 Tellient, AsiaPac Technology Holding and M1’s leasehold stake in MiWorld,
“The proceeds based on the estimated Relevant Consideration represent a deficit of $222 million over the book value of the Proposed Transaction Assets,” Keppel says in its Ch 10 announcement. The loss on disposal translates into a net loss in the P&L, and in turn, will translate into a lower pro forma earnings per share (EPS) for Keppel’s 1FY2025 if the transaction had been completed on Jan 1.
Keppel’s 1H2025 EPS was 20.8 cents. If the interest expense associated with the transaction is excluded, the EPS would have been 21.3 cents on a pro forma basis. However if the loss associated with the transaction is included, 1H2025 EPS declines to 9.1 cents on a pro forma basis. The goodwill that Keppel carries for its investment in M1 in 2019 was around $975 million. However, since goodwill is excluded from net tangible assets, the NTA per share rises to $5.66 on a pro forma basis compared to $5.12 as at Dec 31.
“This transaction ties in very neatly with the push that we have to make Keppel an asset-light global asset manager and operator. The sale of this business will impact in terms of the top line, because there is a significant revenue that everyone brings in. But we are not really focused on the top line. If you look at our business model now, we are more focused on return on equity, and how we can streamline our balance sheet to make it more efficient. Whilst the bottom line will decrease, the $1 billion of cash that will come in will be quite valuable,” says group CEO Loh Chin Hua.
He cites three possible uses of the proceeds, new investments, returning cash to shareholders and reducing debt. “If we deploy the cash into growth opportunities, that would mean that we will get new stream of earnings, whether it is, it is a new network, data centres or our fund management. Of course, if we reward our shareholders, the total shareholders return will improve,” Loh adds.
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Keppel DC REIT announced the proposed sale of the M1 NetCo bonds and preference shares in conjunction with Keppel’s proposed sale of M1’s telco business to Simba Telecom. Keppel DC REIT invested $88.7 million in the NetCo bonds in 2021 at a yield of 9.17%.
The sale of M1 to Simba will enable Keppel to focus on the ICT business. Loh says this will be positive for its data centre business "Retaining the ICT business will put us in a stronger position in terms of tapping the enterprise market. We like hyperscalers but they represent large demand. Because of their size, they typically sign very long leases, and are able to command much lower rental for what they take versus the enterprise customers. With the ICT business, it will strengthen our ability to tap the enterprise market for our data centres and [we will be able to achieve] higher rents,” Loh explains.
JP Morgan calculates that the proposed sale of the M1 NetCo bonds is likely to be dilutive to Keppel DC REIT’s FY2026 DPU to the tune of 1.8%. “We anticipate that the proceeds will eventually be redeployed into new data center acquisitions. While the divestment is DPU dilutive near term, we are positive that the full redemption of the bonds/preference shares enables KDC REIT to re-focus on its core strength in data centre assets,” JP Morgan says.
