http://www.businesstimes.com.sg/arch...-property-play

Published August 06, 2012

COMMENTARY

F&N may lose draw as property play

Without APB, soft drinks, dairy operations, its popularity among fund managers may wane

By Wong Wei Kong


WITH a nod to Heineken's offer to buy its stake in Asia Pacific Breweries (APB) for $5.1 billion or $50 a share last Friday, the wheels may have been set in motion for Fraser and Neave (F&N) to break up and - many expect - become a pure property play.

Becoming just another property group, however, could make F&N less attractive to investors than what it is now.

But first, F&N shareholders need to agree to the Heineken deal. Along with other conditions, approval from F&N's shareholders at an extraordinary general meeting (EGM) is required. This would be a simple majority of shareholdings represented and voting at the meeting. Once that is obtained, Heineken will make a mandatory general offer for the rest of the Tiger Beer brewer for a further $2.4 billion.

Looking at the shareholding structure of F&N, getting the needed approval may not prove a major obstacle.

The two biggest shareholders of F&N are Thai Beverage (ThaiBev) and Kirin. ThaiBev has a deemed interest of 24.1 per cent of F&N, having bought 2.1 per cent through married trades, and 22 per cent from OCBC, Great Eastern and Lee Rubber Co last month. ThaiBev's deal with the OCBC stable is not yet complete but is expected to go through, in time for it to vote on the sale of APB. It has, thus far, been keeping its cards close to its chest.

Japan's Kirin owns almost 15 per cent of F&N, but it has said it has no plans to challenge Heineken for APB.

But even if both ThaiBev and Kirin oppose the deal, they will not be able to block it on their own with a combined 39 per cent stake.

The rest of F&N is mostly held by fund managers, including names like Black Rock, First State, Vanguard and Aberdeen Asset Management. These institutional investors are likely to have different considerations from those of Thai Bev and Kirin. An attractive cash offer on the table, the prospects of special payouts from the proceeds, and indeed, the potential gains from a future asset play on F&N, could move many to vote for the deal. That simple majority is an achievable target.

And so, the question that will now fan the market's imagination: what will F&N be after the sale of APB?

In terms of its existing portfolio, F&N will be left with its soft drinks business, which brought in $113 million in pre-tax earnings in FY2011; dairy operations ($37 million); printing and publishing ($27 million); commercial property ($161 million) and development property ($408 million). APB had contributed $372 million in pre-tax earnings in FY2011. Clearly, without APB, the property business will become F&N's dominant earnings driver by far.

Still, becoming a pure property player is by no means the only option. F&N could remain a conglomerate. It could use the cash from the APB sale to rebuild its food and beverage (F&B) portfolio. It could turn predator, and acquire F&B, or even brewery assets elsewhere.

It could, on paper at least, divest everything including its property assets, return all its cash to shareholders, and delist.

The market, however, is betting that F&N will sell its other assets and focus on property. Its soft drinks business, along with its dairy business, is seen attracting potential buyers, including the likes of Kirin and Coca-Cola. With the cash from APB, and other potential asset sales, F&N would be able to invest substantially in its property business, which now has residential properties, serviced residences and commercial properties in markets including Britain, China, Australia and Singapore.

But that could make F&N a less attractive stock in the longer term.

The fact that so many institutional funds hold F&N now is because it offered an exposure that is quite unique in the Singapore market. It was a play into tightly-held APB and fast-growing beer markets, and on the other, a play on rising Asian consumerism through the F&B segment. Together with the property exposure, it made F&N a stock which many fund managers included in a Singapore portfolio.

Now, APB may soon be sold, followed possibly by the F&B operations.

If F&N ends up a property play, it will join a sector that is already overly represented in the Singapore market. Indeed, the property culture runs so deep here that there is a long list of companies, big and small, that have switched to property from other core businesses. For the market as a whole, it will simply continue the loss of manufacturing plays from the bourse. As if to drill home the point, Cerebos, another old name and the maker of Brands Essence of Chicken, last week announced that it was being privatised even as the drama unfolded at F&N.

The question, then, is whether the fund managers who now own F&N (and who may well vote for the APB deal to go through) would continue to own the stock if it becomes just another property counter after the current asset play is over. After all, they would most likely already have the likes of CapitaLand, City Developments and Keppel Land in their portfolios. Can F&N, as a pure property play, offer an exposure that will stand out? It will be an irony if F&N, in boosting shareholder returns now, end up meaning less to investors in the longer term.