Breakingviews - Messy Singapore deal strains to lay new foundation

An office worker passes a Capitaland signage in the central business district in Singapore January 11, 2021. REUTERS/Edgar Su - RC2J5L94QARR

MUMBAI (Reuters Breakingviews) - CapitaLand wants to build something new in Singapore. The $15 billion owner of shopping malls and office parks stretching from the Lion City to Britain to China is trying to carve itself up, with the help of its biggest backer. Even if investors are willing to embrace the intricate deal, achieving the desired post-transaction valuation will be difficult.

Under terms unveiled this week, CapitaLand proposes to sell its development business to an entity wholly owned by sovereign fund Temasek. The rest would be listed as a single entity, with S$115 billion ($85 billion) of assets under management, comprising stakes in six publicly traded trusts and some 20 private equity funds. CapitaLand, which recently booked big impairments, would keep 52% of the new company.

The split makes sense. Developers are capital intensive and tend to fetch lower valuations than investment managers, which have recurring fee income. Before the deal was announced, CapitaLand was valued at 70% of book value. Australian outfits Lendlease and Goodman trade, respectively, at 1.3 times and 2.6 times.

There may be some hitches, however. The restructuring is designed to reduce complexity at a company that analysts have struggled to value, especially since CapitaLand’s $8 billion acquisition of Temasek-owned Ascendas-Singbridge in 2019. Untangling the knot is proving equally messy, partly because the company is trying to preserve links between the separated parts to smooth the sale of future developments.

Some essential details are also missing for now. Minority shareholders with 48% of CapitaLand would end up with the same size stake in the newly listed entity, plus cash and shares in a real estate investment trust. The value of the offer will be easier to assess once CapitaLand discloses the new entity’s earnings and the amount of debt it will carry.

A more richly valued stock would provide a better currency to fund expansion. The trouble is that Singapore’s market tends to focus, even obsess, over yield, or income, rather than the sort of growth being targeted with this financial engineering. For all their property nous, Temasek and CapitaLand may have overlooked the most important aspect of any real estate deal: location.


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