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Comfort being shortchanged
in merger with Delgro?
By Mano Sabnani, Business and Financial Consultant
First published in TODAY
15-16 Mar 2003
Two
seems to be the favourite number on the corporate scene these
days, especially among GLCs. Singapore has two public-sector
healthcare groups(National Healthcare Group and Health Corporation
of Singapore) two large shipyards (Keppel and Sembawang),
two major telecom groups (Singtel and Singapore Technologies
Telemedia) and there is an official preference for just to
strong long banks.
Now,
there is a move to merge Comfort Group with Delgro Corporation,
to
create a large company that will overshadow the SMRT Corporation,
with a market value of about $1.5 billion. While SMRT dominates
the mass rapid transit business, ComfortDelgro will dominate
the taxi business, owning 26,290 taxis in
Singapore, China and the UK and 2,640 rental cars in China,
the UK and Malaysia.
The
merger is positive for both companies in terms of synergies
of their businesses and geographic presence. There will be
economies of scale and cost savings. It should facilitate
growth, especially overseas, in the longer term. However,
the terms of the merger may not be seen as entirely equitable,
especially for Comfort shareholders.
As
it stands, the share swap terms will result in Comfort and
Delgro shareholders ending up, collectively, with about 50
per cent of the merged company. But this does not reflect
the divergent performances of the two companies in the last
few years.
Since
FY 1999, Comfort has grown in profit each year, to an estimated
$96 million for the year ending March 2003. Annual compound
growth has been 31 per cent. In contrast, Delgro has seen its
net earnings fall from just under $100m in FY 1999 to a mere
$57 million for the year ended Dec 2002, a compound decline
of about 11 per cent. In terms of return on equity, Comfort
is scoring about 16 per cent versus Delgro's 10 per cent.
The
divergent performances of the two companies in the last few
years suggests Comfort should be valued more highly than Delgro.
Even on a conservative approach, Comfort shareholders should
receive 55 to 60 per cent of the combined entity, which means
10 to 20 per cent more shares in the new ComfortDelgro. The
merger is being put to shareholders of both Comfort and Delgro
next Wednesday, March 19, and it would be interesting to see
if minorities in Singapore are alert enough to do something.
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