• Keppel-SPH makes pre-conditional VGO for M1 at S$2.06/share in cash.
• We think the VGO is likely to go through, even if Axiata does not accept offer.
• We upgrade M1 from Hold to Add with a higher target price of S$2.06.

Keppel and SPH Make VGO for M1 at S$2.06/share

Keppel Corp (SGX:BN4) and Singapore Press Holdings (SGX:T39), via an SPV (“Konnectivity”), have made a pre-conditional Voluntary General Offer (VGO) for all M1 shares at S$2.06/share in cash.

Konnectivity (and parties in concert) have 33.27% deemed interest. Pre-condition for this VGO is regulatory approval from the Infocomm Media Development Authority (IMDA). The VGO is also conditional upon Konnectivity (and parties in concert) obtaining sufficient acceptances such that it holds more than 50% of M1 at close of offer.

No Intention to Preserve M1’s Listing Status

• If pre-conditions are met, a firm offer is estimated to be made in eight weeks’ time (from 22 Nov), while the estimated earliest possible close of offer is by 10 Jan 2019. Upon offer closing, there is no intention to preserve M1's listed status, if the free float requirement is not met.
• Keppel-SPH’s rationale for the VGO is the need to undertake extensive business transformation over the next few years, in light of intensifying competition.

VGO Is Likely to Go Through

Why we expect the VGO to go through:

1. IMDA is unlikely to object, as the transaction will not alter the competitive landscape;
2. It is not subject to Axiata's acceptance. Konnectivity only needs a minimum acceptance of 17.23% (outside of SPH's 13.45% stake tendered to it), in order for it (and parties in concert) to hold more than 50% of M1 at close.
3. Other shareholders should accept the VGO as it is at a 26%/29% premium to the last traded price/3-month volume weighted average price (VWAP).

Will Axiata Accept the Offer?

We are unsure if Axiata will accept the VGO. It did not proceed to sell its 28.7% stake during last year’s strategic review (when M1's share price was S$2.10-2.30), as bids received did not met its criteria. However, that exercise may have better informed Axiata on M1's market value and with Keppel-SPH taking the driver's seat going forward, it may reconsider its position.

If Axiata accepts:

1. it will receive RM1.66bn cash, or 18.5 sen per Axiata share, which can be used to pare down debt and/or re-invested into higher growth businesses (special dividends unlikely, in our view),
2. gain on disposal is RM97m (M1's book value: S$1.94/share), and
3. our SOP-based target price will rise by 5 sen/share to RM4.90 (as we have only imputed in S$1.50/share fair value for M1) .

M1 Upgraded to ADD; Revised Target Price Is S$2.06

• We upgrade M1 to ADD with a revised target price of S$2.06 based on the VGO price, as we believe the transaction is likely to go through.
• Key downside risk is non-approval from IMDA or insufficient acceptance for the VGO.

Source: CGS-CIMB Research - 27 Sep 2018