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Morningstar | Time to Check Out: City Developments Knocks on Millennium & Copthorne's Door Again

No-moat City Developments Ltd. launched a second takeout attempt of Millennium & Copthorne, offering GBP 776.29 million for the remaining 34.8% stake in M&C it did not already own. Despite the positive share price reaction to the announcement, we continue to see the real estate conglomerate as undervalued, trading at a 25% discount to our unchanged fair value estimate of SGD 12 per share. Our fair value estimate represents a fiscal 2019 price/book of SGD 1.15 times, in line with the historical 10-year average. We continue to see a lack of positive catalysts in the near term with restrictive measures on the residential sector remaining in place. While the group has diversified away from Singapore residential development, the segment contributes to 25% of group total assets. We believe the transformation to increase recurring income from investment properties and funds management is a positive, though the transition will be slow. Any positive progress could see the developer rerate toward our fair value estimate. An aggressive pursuit in acquiring investment properties could bring the risk of overpaying for new assets. As such, we view the current M&C deal in consolidating stakes in a familiar asset favourably.

Our view at the time of the original offer does not change, and we do not expect significant benefit from a strategic perspective, given that CDL holds a number of M&C board seats and the entities share the same chairman. However, the transaction does streamline the corporate structure of CDL and provides full control for CDL to redevelop the hotel assets within M&C’s hotel portfolio. As such, the second bid comes as no surprise and is logical, in our view, given the familiarity of the M&C assets. We believe the acquisition is lower risk relative to earlier investment, such as the SGD 1.1 billion deal for a large minority 24% stake Sincere Holdings announced at the first-quarter result.

CDL continues to redeploy excess cash, and this M&C deal adds to the 10-year, SGD 900 million recurring income target. Recurring income contributed to SGD 530 million in fiscal 2018. Net of the Sincere deal, the acquisition of the remaining M&C stake at SGD 1.34 billion and cash balance of SGD 620 million at M&C, we estimate CDL’s cash balance remains high at SGD 6.4 billion, leaving plenty of room for further investments. This is also supported by a prudent debt level.

The bid equates to GBX 685 per share, representing a 37% premium to M&C’s last closing price and GBX 65 higher than the previous bid of GBX 620. The previous offer in late 2017 did not meet the minimum acceptance condition of more than 50% of M&C shares it did not already own as some institutional investors believe the bid undervalued M&C and rejected the offer. For the current offer, CDL has secured minority shareholder support equating to 43.6% of M&C shares it did not already own while M&C’s independent directors also recommended this final offer.