SPH provided the circular today about its upcoming move to IPO their REIT. For me it is a good lesson of how well they executed this financial engineering.
Presentation slide can be viewed here.
Paragon spin-off as a 99 year leasehold
While Paragon is a free hold property, SPH have effectively did what Keppel Land did when they sold off Ocean Financial Centre as a 99 year lease hold.
SPH gets to hold on to that land while again the REIT investors may think they have the full worth of a lucrative free hold.
The latest valuation is at 2.6 billion. They spin it off at 2.5 billion. Winner.
Realized $900 million in value
Compared to book value of 2.1 billion, SPH will list the assets by selling it off at nearly 3 billion.
They will pay out $0.18 out of $0.558, letting them keep $0.378 or 609 million.
If the current share price have factored in this 55 cents (after the recent run up) The price will jump to $4.70.
I suspect the price have already been factored in.
Cash flow for SPH maintained
The cash flow in contention here are the cash flow derived from Paragon and Clementi that they stand to lose.
Proforma FY2012 income comes up to $115 mil.
Since SPH will retain 70% share of it, 80.5 mil. Add a 0.5% management fee for the 3100, you will get another 15.5 mil per year.
So net income adds back to 96 mil.
This will ensure that future years dividends are somewhat maintain. Since publishing cash flow have tapered off, this is a good move.
Free up $900 million of debt headroom
SPH effectively shifted $900 million debt into the REIT, likely non-recourse.
Together with the cash, they will be able to make a leveraged $1.5 billion investment.
At 4% yield, that will generate 60 mil in income. If they can find higher value investment, even more.
This together with Seng Kang mall’s income may add 25% of current div. This will buffer declining publishing.
Overall, this is a good example of how value can be realized at the right time in a good spin off.
Still wondering if the REIT is actually worth it.
At this moment the parent looks better value.