More upside in store for UOL and UIC

June 27, 2017

LYNETTE KHOO


THERE'S more than one way to skin a cat, and seasoned businessman and veteran banker Wee Cho Yaw clearly knows that - going by his latest effort towards his long-time goal of unlocking value in United Industrial Corporation (UIC).

With UIC's second-largest shareholder Philippine tycoon John Gokongwei still a likely hurdle to a takeover of UIC by Mr Wee, the latter has adopted a more prudent and astute approach to gaining control of UIC.

On Friday, UOL Group - another property company that Mr Wee chairs - announced an option agreement with Haw Par Corp, which if exercised, will see it issue 27.3 million new shares to Haw Par in exchange for 60 million UIC shares.

This will shore up UOL's stake in UIC from 44.71 per cent to about 48.94 per cent. UOL has received a waiver from the Securities Industry Council of Singapore from making a mandatory general offer for UIC, on condition that its stake in UIC does not exceed 49 per cent.

Though the market seemed disappointed that an outright privatisation of UIC did not take place, this is more than just a paper exercise. Crossing the 50 per cent statutory control of UIC is imminent from here, which is expected to unleash major operational synergies between UIC and UOL Group.

The "creep rule" in the Takeover Code allows UOL and the Wee family entities to buy additional UIC shares of no more than one per cent of voting rights over a six-month period. Once the stakeholding crosses 50 per cent, the creep rule no longer applies and UOL will have a free rein in accumulating UIC shares more aggressively.

Decision uncertain

Of course, it remains uncertain whether Mr Wee will decide to, through UOL, mount a takeover of UIC from here. Mr Gokongwei and Mr Wee have had a history of competing neck and neck for UIC; both have been shoring up their stakes since their unsuccessful mandatory conditional offers for UIC in 2005 and 2009 respectively.

Going by Mr Wee's painstaking efforts to build up his stake in the illiquid stock through open market purchases to a deemed level of 49.76 per cent, it may suggest that he has been careful not to trigger a takeover offer just yet and that Mr Gokongwei's stance probably has not changed.

And with the office market bottoming and UIC poised to benefit from its prime office assets located in the Central Business District including UIC Building, Singapore Land Tower, Clifford Centre and SGX Centre, Mr Gokongwei is likely to demand a significant premium for his 37 per cent stake in UIC that he holds through JG Summit.

One can only guess what can happen from here. Maybank Kim Eng had said in a report in December that a potential share swap between the two tycoons using UOL shares is one possible resolution for both to enjoy the future value-unlocking and growth of UIC. Credit Suisse also flagged earlier this month the possibility of UIC's free float dropping below 10 per cent (now at 13.2 per cent), triggering a mandatory delisting of UIC and compelling Mr Gokongwei to reassess the long-standing ownership tussle.

But until a consensus is reached between the two tycoons, one can still expect some significant unlocking of value in UIC.

For a start, the announced share swap between UOL and Haw Par for UIC shares is already earnings and assets accretive for UOL due to a reclassification of UIC from an associate to a subsidiary under financial accounting principles, and a mark-to-market of hotel assets previously held at depreciated costs on UIC's books.

Greater synergies

While UOL and UIC have already collaborated on a number of property development and commercial projects in the past, there will be greater operational synergies between the two once UOL gains statutory control of UIC - an event that may take place in the next 12 months.

Known for its executional strengths in residential development and asset management, UOL has achieved high sales velocity in its launched projects and occupancies in commercial properties. Having control over UIC will allow UOL to deploy its resources in moving substantial unsold residential units at Pollen & Bleu, Mon Jervois and Alex Residences - which are projects by UIC unit Singapore Land - and raise the value of UIC's retail and office portfolio through redevelopment or asset enhancement.

Despite UOL's exposure to some S$15.7 billion worth of properties across office, retail and hospitality sectors in Singapore and overseas, it has not set up a capital recycling platform, unlike other Singapore-listed large-cap property peers. The lack of effective control over many of these assets that come under UIC is seen as a hindrance to setting up a capital recycling platform such as a real estate investment trust.

Such a platform will be a key catalyst for UOL in future, allowing it to realise a healthy gain on divestment, crystallise balance sheet value, and recycle cash proceeds for investments, Credit Suisse said in a report. "There remains significant restructuring potential, however, with control over UIC being the key enabler for further restructuring to be done."

More transparent

From a governance standpoint, UIC - whose disclosures have previously been confined to regulatory filings - will finally become more transparent under UOL. This will enable the market to price the company better.

As things stand, there is much upside in store for UOL and UIC even before the two tycoons come to a consensus on their shares. As an astute businessman, one would also expect Mr Gokongwei to embrace efforts to unlock value for the company, as that can only benefit him as a major shareholder.