June 10, 2019

City Developments Limited (CDL) announced that it has launched a pre-conditional final cash offer for the remaining 34.8% stake in Millennium & Copthorne Hotels Plc (M&C) which it does not own. The offer price comes in at 685 pence per share, which CDL highlighted is final and will not be increased. This represents a premium of 37.0% to M&C’s closing price before the announcement and is also 10.5% higher than the previous cash offer of 620 pence per share (including a special DPS of 20 pence). That offer was made on 21 Dec 2017 and lapsed on 26 Jan 2018 as CDL could not satisfy the minimum acceptance condition.

We believe conditions have changed since that fateful last offer. M&C’s operations have continued to be fraught with challenges. Furthermore, CDL has managed to secure irrevocable undertakings from a number of key minority shareholders such as JNE Partners LLP, MSD Capital, L.P., International Value Advisers, LLC, Classic Fund Management AG and BWM AG to accept the final offer. These shareholders own ~43.6% of the M&C shares not already owned by CDL. Besides regulatory approvals, this final offer is also conditional, amongst other things, on CDL securing valid acceptances of more than 50% of the M&C issued share capital not already owned by CDL. M&C’s independent directors have also stated that the terms of the offer are fair and reasonable, and intend unanimously to recommend that M&C shareholders accept the offer. The maximum cash consideration payable by CDL amounts to GBP776.3m (~S$1.34b) and will be funded via internal cash resources and debt.

Based on our RNAV methodology on CDL, M&C is currently valued based on its market value (i.e. trading share price). Thus, we see potential upside to our fair value estimate of CDL should the privatisation exercise be successful and our valuation of M&C is based on its book value instead (takeover offer price of 685 pence per share translates into a P/B ratio of 0.82x based on 1Q19 financials). Pending the outcome of this development, we keep our fair value estimate of S$10.68 on CDL. Maintain BUY – OCBC Research

City Developments Limited closed at: S$8.97