CAPITA MALLS ASIA: A BUYOUT OFFER FROM CAPITA LAND

ASSIGNMENT QUESTIONS: 1. Compute CMAs weighted average cost of capital (WACC).

2. Perform a discounted cash flow (DCF) valuation for CMA. Notes: 1. Data in the exhibits (excluding Exhibit 6 and 9) are in Singaporean Dollars (SG)

2. You can calculate depreciation expense using the fixed assets and straight line depreciation over the time period that the valuation is performed.

3. Corporate tax rate is 17%

(pdf solution + Excel Spreadsheet)

CAPITA MALLS ASIA: A BUYOUT OFFER FROM CAPITA LAND Ruth S.K. Tan, Zsuzsa R. Huszr, Weina Zhang, and Shao Yu Hong wrote this exercise solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G ON1; (0) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright 2019, National University of Singapore and Ivey School of Business Foundation Version: 2019-06-17 It was April 15, 2014, and trading had resumed for the shares of Capital and Limited (CapitaLand), a large, Singapore-based real estate company, and for the shares of CapitaMalls Asia Limited (CMA), a commercial property development and management company. The trading halt had been called the day before so that Capital and could announce its voluntary conditional cash offer of SG$2.222 for each share of CMA through its wholly owned subsidiary Sound Investment Holdings Pte Ltd. The intention was to delist CMA and integrate it into the Capital and Group. The offer was conditional on Capital and garnering more than 90 per cent of CMA. At the time of the offer, Capital and already owned 65.3 per cent of CMA. The cash offer of $3.06 billion for the remaining shares was 27 per cent above CMA's one-month volume-weighted average price. The per-share price in the offer was also 20.7 per cent higher than CMA's net asset value per share as at December 31, 2013, and represented a premium of 22.3 per cent over the closing price of $1.815 on April 11, 2014. The offer price would be reduced for any CMA dividends distributed on or after the announcement date, including a proposed final CMA dividend of $0.0175 per share for the financial year ending in 2013. If acceptance levels crossed the 96.5 per cent threshold, Capital and would be able to compel acquisition of all of CMA's shares. 10 As an investor in CMA, you were congratulating yourself on the unexpected windfall. However, the news also made you wonder about the intrinsic value of CMA. When trading resumed on April 15, you noted that CapitaLand's share price had also risen. Thus, not only was there a premium for the target shareholders, there was also value created for the acquiring shareholders. In fact, you could calculate the estimated synergy arising from the acquisition from the premium and the net present value of the acquisition. CAPITALAND Capital and had its headquarters in Singapore and was listed on the Singapore Exchange Limited. Its businesses in real estate and real estate fund management were focused in Singapore and China." As of December 31, 2013, the company had assets of $14.91 billion (45 per cent of the group's assets) in China, the company's largest market, and assets worth $12.52 billion (38 per cent of the group's assets) in Singapore, which was the company's second-largest market.12 Page 2 9B19N012 Following a strategic review in 2013, Capital and had been reorganized into four business units: Capital and Singapore, CapitaLand China. CMA, and the Ascott Limited (Ascott). CapitaLand Singapore and Capital and China developed residential, office, and integrated or mixed-use properties. Despite challenging market conditions, Capital and Singapore had almost doubled the number of private residential units it sold in 2012 by "right-sizing the units. CapitaLand China had refined its strategy to focus on mass market and first-time buyers and upgraders and had become the largest foreign real estate developer in China." CMA was in the business of shopping malls, and Ascott in serviced residences. CMA had achieved high shopper traffic and net property income, and in 2013, it announced a partnership to jointly develop the Jewel project at Changi Airport. 14 Ascott, which operated more than 33,000 apartment units across 82 cities in more than 20 countries," had achieved modest revenue growth in 2013.16 CAPITAMALLS ASIA LIMITED (CMA) CMA, founded in 2004, went public in November 2009 at an initial offering price of $2.12 per share and raised $2.8 billion. After this initial public offering. Capitaland's shareholding interest in CMA was reduced from 100 per cent to 65.5 per cent. When it was listed CMA was one of the largest pure-play shopping mall owners, developers, and managers in Asia. Its shares closed at $2.30 on the first day of trading. CMA used an integrated shopping mall business model, with interconnected buildings where shoppers could live, work, and play. Its primary business objective was to be a leading owner, developer, and manager of shopping malls in Asia. As of December 2013, CMA had a pan-Asian portfolio of 105 shopping malls valued at $34.3 billion.20 It had $1 billion in cash and a debt-to-asset ratio of 25 per cent (see Exhibit 1). MOTIVATION TO DELIST CMA Capital and had several reasons for delisting CMA. First, because CMA's integrated developments tended to enjoy high foot traffic from a captive base of offices and residences, the developments were expected to enhance Capitaland's competitive strengths. Second, delisting CMA would simplify Capitaland's organizational structure. Third, the delisting would give Capital and more flexibility in allocating its capital and expanding its scale.21 Fourth, it would unlock shareholder value and achieve synergies.22 CapitaLand claimed that the acquisition of CMA would immediately raise earnings per share by approximately 21.5 per cent and improve return on equity from 5.4 per cent to 6.7 per cent. However, it was not clear whether increasing earnings per share was a good reason for the acquisition President of CapitaLandLim Ming Yan, said, "The market has changed. Earlier companies were pure-play residential; now companies are emerging that are doing mixed developments, which include homes, offices, and malls. This move will help us compete better."24 According to an analyst at Barclays Plc, "Capital and's offer to take CapitaMalls private is a win-win for both CapitaMalls and Capitaland. Regaining full control of CapitaMalls should allow Capital and more flexibility, including the ability to streamline its organizational structure."25 However, according to Samsung Asset Management Co. Ltd. (Samsung Assets), the transaction showed that Capital and could not put the money to better use at a time when the property markets in Singapore and China were starting to weaken. In a similar vein, an investment manager at Samsung Assets in Hong Kong commented Page 3 9B19N012 The company is effectively undertaking financial engineering to enhance returns. The problem is these returns are still unsatisfactory relative to the cost of equity and suggests a lack of investment opportunities in an adverse environment of declining property prices in Singapore and slowing growth opportunities in China. 27 FINANCIAL PERFORMANCE AND VALUATION To calculate the value of your investment in CMA, you could conduct valuations of CMA's shares using the discounted cash flow (DCF), discounted dividend model (DDM), relative valuation (RV), and precedent transaction methods. DCF valuation is based on the principle that the value of a business is determined by its ability to generate cash flows. The relationship between the business's revenue and cost drivers can be gleaned from the company's historical financial statements (see Exhibits 1-4 or refer to the student Excel worksheets "CMA Financial Statements" and "Capital and Financial Statements [Ivey Publishing product number 7B19N012]). These can be used to project a company's cash flows for the initial few years, after which a terminal growth rate can be applied in perpetuity (see Exhibit 5 or refer to the Excel worksheet Information about Capital and). All projected cash flows will be discounted by the weighted average cost of capital. DCF models provide insights into the drivers of share value, but small changes in inputs can result in large changes in intrinsic value. The DDM method assumes that a stock is worth the sum of its discounted future dividend payments. The discount rate used is the cost of equity capital. For stocks with a solid history of dividend growth, it is reasonable to assume that the historical growth rate will continue for some years, after which a terminal growth rate will be applied (see Exhibits 5 and 6). The DDM is a simple and convenient way of valuing stocks, but it can be sensitive to the assumed growth rates." The RV method compares the value of a business to those of its competitors, using common multiples or benchmarks such as price-to-earnings (PE), price-to-book (PB), and price-to-sales (P/S) ratios. The P/E ratio indicates how much investors are willing to pay per dollar of earnings. It is a widely used peer multiple, but because the denominator is eamings, investors have to be careful when comparing peers from countries that are subject to different accounting regulations. In addition, PE cannot be applied if earnings are negative. The P/B ratio compares a stock's market value to its book value. The ratio is calculated by dividing the price of the stock by the book equity per share. It gives some idea of whether investors are paying a reasonable price for the equity that will be left if the company were to go bankrupt immediately. For example, a P/B ratio of less than one indicates that investors can theoretically buy up all the shares of the company, liquidate the assets, pay off the company's liabilities, and still have money left. The P/S ratio compares how much investors are willing to pay per dollar of sales. Because sales is a top-line figure and is therefore less affected by accounting policies, this is a useful multiple for businesses that have yet to generate positive earnings, and it is useful for comparing businesses that are subject to different accounting regimes. Regardless of which multiple is used, it is important to develop accurate benchmarks, and it is crucial to compare only businesses from the same industry and with similar market capitalization. Thus, although information had been gathered on a number of CMA's potential peers (see Exhibits 7 and 8 or student Excel Page 4 9B19N012 worksheets "Peer Financial Ratio" and "Other Key Peer Financial Data"), further deliberation would be required to identify a suitable comparison group. In addition to relative valuation, precedent transactions could also provide some useful information Precedent transaction analysis uses the prices paid for similar companies to estimate the worth of a target company. Under normal market conditions, transaction comparables provide higher multiple ranges than peer comparables because acquirers normally pay control premiums and strategic buyers often have the opportunity to realize synergies. To assess the value of CMA, information on 12 precedent transactions had been retrieved for consideration (see Exhibit 9, or student Excel worksheet Precedent Transactions"). PREMIUM, NET PRESENT VALUE, AND SYNERGY By the close of trading on April 15, 2014, Capital and's shares had increased 6.5 per cent to $3.11. CMA's shares had surged 21 per cent, from the closing price of $1.815 on April 11, 2014, to $2.19 (see Exhibit 10)the company's biggest gain since going public in 2009. Based on the market response, it appeared that the shareholders of CMA and Capital and clearly approved of the transaction. In fact, the net present value of the acquirer could be estimated directly from the response of CapitaLand's share price on April 15th. This, together with the premium for the target, would provide an estimation of the synergy created. Page 5 9B19N012 EXHIBIT 1: CAPITA MALL ASIA'S BALANCE SHEETS (IN SG$ THOUSANDS) 2012 2013 0 0 301.773 1.004.312 Development Properties for Sale Trade and Other Receivables Cash and Cash Equivalents Total Current Assets Plant and Equipment Investment Properties Property under Development Subsidiaries Associates Jointly Controlled Entities Other Investments Other Assets Total Non-Current Assets TOTAL ASSETS 2009 0 436,013 544,308 980,319 14,686 1.378,567 127,686 0 2.999,393 875,398 200,028 933 5,396,671 6,376,990 2010 0 498.281 1,318,312 1,816,593 13,197 304,429 288.848 0 3,119.729 1,043,656 378.653 17,072 5,165,584 6,982, 177 2011 8,827 217,862 975,479 1,202,168 16,198 618,988 1.000, 102 0 3,521,066 1.138,861 425,622 97.045 6,875,880 8,078,048 533,047 875,351 1,208,398 17.019 1,565.789 548.141 0 3,671.971 2,335 326 441.306 143.384 8,722,936 9,931,334 1,306,085 19,304 1,548,594 148,934 0 4,195,179 2,445.766 498,489 202.441 9,054,687 10,360,772 Trade and Other Payables Loans and Borrowings Current Tax Payable Total Current Liabilities Loans and Borrowings Deferred Tax Liabilities Other Non-Current Liabilities Total Non-Current Liabilities TOTAL LIABILITIES 377,622 72,155 49,111 498,888 430,738 30.065 23,845 484,648 983,536 295 396 12.260 68,102 365,758 687,892 33,121 7,378 728,189 1,093,947 213, 132 238,938 51,448 503,518 990,805 85,021 21,579 1,097,405 1,600,923 240.890 8.922 55.526 305,338 2,705,400 88.563 93.982 2,888,035 3,193,373 284, 108 157.763 54.976 496,847 2,428,283 98,524 70.416 2,595,223 3,092,070 4.605,000 735,041 4,605,000 1,223.519 4.607,514 1,619,477 4,612.590 1.877.757 4.620.971 2,542.797 5,340,041 5,828,519 6,226,991 6,490,347 7,163,768 Share Capital Other Reserves Equity Attributable to Owners of the Company Non-Controlling Interests Total Equity TOTAL EQUITIES AND LIABILITIES 53,413 5,393,454 6,376,990 59.711 5,888,230 6,982,177 250.134 6,477,125 8,078,048 247.614 6,737,961 9,931,334 104,934 7,268,702 10,360,772 Source: Created by the case authors based on information obtained from CapitaMalls Asia Limited, Clarity, Sustainable Growth: Annual Report 2013 accessed January 27, 2017, http://infopub.sgx.com/FileOpen/CMA%20AR(Final)_2013.ashx? App=Prospectus&FileID=20423: CapitaMalls Asia Limited, Extending Reach Seizing New Opportunities: Report to Shareholders 2012, accessed January 27, 2017, http://capitamallsasia.listedcompany.com/misc/2012_en/ar2012_en.pdf CapitaMalls Asia Limited, Growing Our Presence in Asia, Report to Shareholders 2011, accessed January 27, 2017 http:/infopub.sgx.com/FileOpen/CapitaMalls%20Asia%20AR%202011(FINAL_ENGLISH).ashx?App=Prospectus&FileID=92 CapitaMalls Asia Limited, Growing Our Presence Report to Shareholders 2010, accessed January 27, 2017 http://infopub.sgx.com/FileOpen/Capita Malls%20Asia%20AR%202010.ashx?App=Prospectus&FileID=10898: CapitaMalls Asia Limited, Asia's Leading Shopping Mall Developer, Owner and Manager: Report to Shareholders 2009, accessed January 27. 2017, http://infopub.sgx.com/FileOpen/CMA%20AR 2009%20PDF%20for%20Registra.ashx?App=Prospectus&FileID=7988. Page 6 9B19N012 EXHIBIT 2: CAPITA MALL ASIA'S INCOME STATEMENTS (IN SG$ THOUSANDS) Revenue Cost of Goods Sold Gross Profit Other Operating Income Administrative Expenses Other Operating Expenses Profit from Operations Finance Costs Share of Profits from Associates & Joint Ventures Profit before Tax Tax Expense Net Income Attributable to: Owners of the Company Non-Controlling Interests Earnings per Share (cents) 2009 228,946 -100.246 128,700 85,019 -70,212 -111,901 31,606 -111.430 489,507 2010 245,402 -91,803 153,599 82,447 -107,419 -1,099 127,528 -25,603 475,884 2011 246,173 -104,204 141,969 252.057 -140,401 -899 252,926 -33,312 348,945 2012 361,178 -140,380 220,789 214,677 -151,388 -4,277 279,801 -69,715 406,501 2013 380,416 -140,360 240,056 139.898 -146,725 -3.802 229,427 -74,015 524.769 409,683 -16,027 393,656 577,809 -28,871 548,938 568,559 -74,341 494,218 616,587 -57.730 558,848 680, 181 -66,054 614,127 388,098 5,500 20.1 541,337 7.601 13.0 456,008 38,210 11.7 546,018 12.830 14.0 600,008 14.119 15.4 BREAKDOWN OF CAPITA MALL ASIA'S REVENUE BY BUSINESS AND GEOGRAPHICAL SEGMENTS (IN SG$ THOUSANDS) 2009 2010 2011 2012 2013 (Business Segments) Management Business Investment Business Others Consolidation Elimination Total 166,360 135,161 2,110 -74,685 228,946 253.788 94,285 2,061 -104,712 245,402 318,372 56,224 1.748 -130, 169 246,173 258,005 109,678 102,183 -108,888 361,178 230.790 154,194 86,337 -70.905 380,416 (Geographical Segments) Singapore China Malaysia Japan India Total 84,332 62,879 2.144 79,134 457 228,946 108.679 78,680 49,520 4,699 3.824 245,402 104.047 104,412 28.876 4.433 4,405 246,173 123,038 159,990 37.570 35,630 4,931 361,178 120,007 185.179 40.581 49,259 5,390 380,416 Source: Created by the case authors based on information obtained from CapitaMalls Asia Limited, Clarity, Sustainable Growth: Annual Report 2013 accessed January 27, 2017, http://infopub.sgx.com/FileOpen/CMA%20AR(Final)_2013.ashx?App= Prospectus&FileID=20423; CapitaMalls Asia Limited Extending Reach, Seizing New Opportunities: Report to Shareholders 2012, accessed January 27, 2017, http://capitamalisasia.listedcompany.com/misc/2012_en/ar2012_en.pdf CapitaMalls Asia Limited, Growing Our Presence in Asia: Report to Shareholders 2011, accessed January 27, 2017. http://infopub.sgx.com/FileOpen/CapitaMalls%20Asia%20AR%202011(FINAL_ENGLISH) ashx?App=Prospectus&FileID=92 CapitaMalls Asia Limited, Growing Our Presence Report to Shareholders 2010, accessed January 27, 2017 http://infopub.sgx.com/FileOpen/CapitaMalls%20Asia%20AR%202010.ashx?App=Prospectus&FileID=10898: Capital Malls Asia Limited, Asia's Leading Shopping Mall Developer, Owner and Manager: Report to Shareholders 2009, accessed January 27. 2017, http://infopub.sgx.com/FileOpen/CMA%20AR 2009%20PDF%20for%20Registra.ashx?App=Prospectus&FileID=7986 Page 7 9B19N012 EXHIBIT 3: CAPITALAND'S INCOME STATEMENTS (IN SG$ THOUSANDS) 2012 Revenue Cost of Goods Sold Gross Profit Other Operating Income Administrative Expenses Other Operating Expenses Profit from Operations Finance Costs Share of Profits from Associates and JV Profit before Tax Tax Expense Profit from Continuing Operations, Net Tax Net Income Attributable to: Owners of the Company Non-Controlling Interests Earnings per Share 2009 2,957,359 -1.931,185 1,026,194 1,238,399 -412,649 -572, 121 1,279,823 -453,922 269,195 1,095,096 -86,482 2010 3,382,742 -2,106,384 1,276,358 892.687 -488.279 -117.421 1,563,345 -448,183 820,852 1,936,014 -285.907 2011 3,019,569 -1.946,684 1,072,885 713,704 -530, 187 -46,459 1,209,943 -472,785 876,646 1,613,804 -190,884 3,301,363 -2,073,289 1,228,074 586,949 -580,251 -52,122 1,182,650 -498,963 834,781 1,518,478 -201,907 2013 3,977,487 -2,891,707 1,085,780 381,127 -517,627 -198,837 750,643 -444.490 1.047.388 1,353,521 -188.008 1,008,634 1,008,634 1,670,107 1,670, 107 1,422,920 1,422,920 1,316,571 1,316,571 1,184,613 1,184,613 1,052,959 -44,325 0.2820 1,273,139 396,968 0.2990 1,057,311 365,609 0.2480 930,347 386,224 0.2190 849.795 334.818 0.2000 BREAKDOWN OF CAPITALAND'S REVENUE BY GEOGRAPHICAL SEGMENTS (IN SGS THOUSANDS) Singapore China Other Asian Countries Australia Europe and Others 2009 2010 2011 2012 2013 978.990.0 1.200,843.0 1,074,785.0 1,189.700.0 1.396,718.0 773,914.0 711,338.0 865,500.0 587,933.0 1.070,435.0 163,291.0 291,700.0 158,354.0 139,890.0 222.902.0 755.789.0 916.159.0 890,213.0 1,182.289.0 1,065,689.0 262.698.0 285,469.0 262,698.0 232.638.0 221,530.0 2,957,459.0 3,382,742.0 3,019,569.0 3,301,363.0 3,977,487.0 Total Note: JV = joint ventures Source: Created by the case authors using information from CapitaLand Limited, Clarity Insight and Foresight: Annual Report 2013, accessed January 27, 2017, https://investor.capitaland.com/misc/ar2013.pdf: CapitaLand Limited, Focus, Balance, Scale, Positioned for Growth: Annual Report 2012 accessed January 27 2017 http://investor.capitaland.com/misc/ar2012.pdf: CapitaLand Limited, The Art of Building: Annual Report 2011, accessed January 27, 2017, http://investor.capitaland.com/misc/ar2011.pdf, CapitaLand Limited, Fim Foundation: Leading Edge innovation in the First 10 Years, Ready for the Next 10 YearsAnnual Report 2010, accessed January 27, 2017 http://investor.capitaland.com/misc/ar2010.pdf; CapitaLand Limited, Ahead of the Curve, Growth during Global Crisis: Annual Report 2009, accessed January 27, 2017, http://investor.capitaland.com/misc/ar2009.pdf. Page 8 9B19N012 EXHIBIT 4: CAPITALAND'S BALANCE SHEETS (IN SG$ THOUSANDS) Development Properties Trade and Other Receivables Other Current Assets Cash and Cash Equivalents Total Current Assets Property. Plant, and Equipment Intangible Assets Investment Properties Associates Joint Ventures Deferred Tax Assets Other Non-Current Assets Total Non-Current Assets TOTAL ASSETS Trade and Other Payables Short-Term Bank Borrowings Current Portion of Debt Securities Current Tax Payable Total Current Liabilities Long-Term Bank Borrowings Debt Securities Deferred Tax Liabilities Other Non-Current Liabilities Total Non-Current Liabilities TOTAL LIABILITIES 2009 3.500,270 1,301,916 196,437 8.729,718 13,818,341 1.772,301 518,020 5,058,507 7,012,174 1.672,056 81,250 233,359 16,347,673 30,166,014 2010 5,419,350 2,139,625 203.009 7,190,064 14,952,048 1,049,407 459,805 4,732.895 8,249.142 1,861.232 308,205 87.686 16,748,172 31,700,220 2011 6.905,124 1.769,374 195.000 6.264.473 15,133,971 1.075,505 458,722 7,074.617 9.290.737 1.394,263 95,671 795,955 20,185,470 35,319,441 2012 7,510,093 1.484,753 201,370 5,497,693 14.693,909 1,263,615 462.093 7.969,402 9,692,297 2.818,985 91,595 795,713 23,093,700 37,787,609 2013 7,382.023 1,164,115 196.923 5,920,152 14,663,213 1,079.239 470.736 4,935.194 11.750.550 2,525 352 73,477 657,124 21,491,671 36,154,884 1.880,017 992,974 404,812 457,374 3,734,977 3.951,770 4.963,198 173,756 462.550 9,551 274 13,286,251 1,894 385 852,255 909,519 498,405 3,952,564 3,798,410 4,797.859 593.238 540.687 9,730,194 13,682,758 2.270,488 426.011 434,228 441,075 3,571,802 6,105,790 5,224,810 627.638 550,130 12,508,168 16,079,970 2.359,598 765,826 16,348 432,489 3,574, 259 6,817,114 6.780,492 858,989 712.971 14,769,566 18,343,825 2,680,483 939,310 254.972 472.711 4,347,476 5,421.543 5,946.962 611.133 516,827 12,496,465 16,843,941 Share Capital Revenue Reserves Other Reserves Equity Attributable to Owners Non-Controlling Interests Total Equity TOTAL EQUITIES & LIABILITIES 6.229,227 6.839,047 339,999 13.408,273 3,471,490 16,879,763 6,276,504 7,652,261 241.888 14,170.651 3,848,811 18,017,462 6,298,355 8,328,115 275,067 14.901,537 4,337,934 19,239,471 6,300.011 8,910,445 -130,048 15.080,408 4,363,370 19,443,784 6,302.207 9,429.970 335.726 16.067.900 3,243.034 19,310,943 30,166,014 31,700,220 35,319,441 37,787 609 36,154,884 Source: Created by the case authors using information from CapitaLand Limited, Clarity Insight and Foresight: Annual Report 2013, accessed January 27, 2017. https://investor.capitaland.com/misc/ar2013.pdf: Capitaland Limited, Focus, Balance, Scale: Positioned for Growth Annual Report 2012, accessed January 27 2017 http://investor.capitaland.com/misc/ar2012.pdf: CapitaLand Limited, The Art of Building: Annual Report 2011, accessed January 27, 2017, http://investor.capitaland.com/misc/ar2011.pdf, CapitaLand Limited, Firm Foundation, Leading Edge: Innovation in the First 10 Years, Ready for the Next 10 YearsAnnual Report 2010, accessed January 27, 2017 http://investor.capitaland.com/misc/ar2010.pdf: CapitaLand Limited, Ahead of the Curve, Growth during Global Crisis: Annual Report 2009, accessed January 27, 2017, http://investor.capitaland.com/misc/ar2009.pdf. Page 9 9B19N012 EXHIBIT 5: OTHER INFORMATION ABOUT CAPITALAND AND CAPITA MALL ASIA Cost of Debt Cost of Equity Beta Number of Shares Terminal Growth Rate (assumed) CapitaLand 2.3244 11.95745003 1.144 4,255,980,000 CapitaMall Asia 2.5842 8.44892252 0.870 3,909,675,000 3% Dividend History Payout Ratio (%) CapitaMalls Asia Year 2006 2007 2008 2009 2010 2011 2012 2013 Payout Ratio* (%) CapitaLand 32. 1673 15.2538 23.5455 42.3568 17.9704 32.1098 31.9881 9.9975 18.4164 25.5478 23.1494 22.6997 42.2338 Note: Payout Ratio = Dividend = Net Income Source: Created by the case authors using data from "Capital Malls Asis (SG1205950543)," and "CapitaLand Limited (SG1J27887962)." Compustat Capitall, accessed January 27, 2016 EXHIBIT 6: HISTORICAL AND FORECASTED GDP GROWTH RATES (IN US$ THOUSANDS) 2011 2012 Forecasted 2016 2013 2014 2015 2017 2018 72.611.8 11.4 74,492.8 2.8 76.330.8 2.5 78.169.0 2.4 73,591.4 -5.9 74,998.6 19 76,259.4 1.7 79.925.8 4.8 13.421.4 13,618.9 7.8 12,620.7 -7.3 13.172.4 4.3 11,592.1 -13.6 11,825.5 2.0 11,331.2 -4.2 1.0 11.583.7 22 21.683.4 5.0 23,3673 5.0 23,475.3 5.1 24.187.2 4.9 24,198.6 0.1 25,317.0 26,604.3 5.1 28,008.1 5.3 Global GDP Growth YoY (%) Europe GDP Growth YoY (%) Asia GDP Growth YoY (%) Australia GDP Growth YoY (%) China GDP Growth YoY (%) Singapore GDP Growth YoY (96) 1,503.7 20.8 1,569.0 3.7 1.500.4 -3.8 1.448.4 -3.5 1,219.1 -15.8 1,252.2 2.7 1,295.3 3.4 1,307.9 1.0 7.438.5 23.8 8,542.2 14.8 9.793.7 14.7 10.855.0 8.8 11,255.4 5.6 11,5980 2.2 11.828.1 2.8 12,420.8 5.0 284.9 287.1 13.0 296.6 11.0 299.4 1.0 292.8 -2.2 278.2 -5.0 299.6 5.2 322.4 7.6 2.4 Source: Created by the case authors using "Real GDP Growth." BMI Research, accessed January 27, 2017 Page 10 9B19N012 EXHIBIT 7: FINANCIAL RATIOS AND NATURE OF OPERATIONS OF POTENTIAL PEERS Current Ratio 18.61 3.57 2.41 3.43 1.99 Quick Ratio 2.12 1.18 0.29 2.94 0.67 0.41 0.19 Solvency Ratio 0.55 0.12 0.03 0.18 0.22 0.06 0.09 4.81 Bukit Sembawang Estates City Developments Ltd Frasers Centrepoint Limited Global Logistic Properties Hongkong Land Holdings Ltd Pollux Properties Ltd Sinarmas Land Ltd Tuan Sing Holdings Ltd UIC-United Indust Corp Ltd UOL Group Ltd Wheelock Properties (SGP) Wing Tai Holdings Ltd Yanlord Land Group Ltd Yuexiu Property Co Ltd Debt! Equity 0.00 51.82 32.94 31.86 18.47 151.03 24.54 120.87 15.77 32.09 21.04 47.53 62.13 94.85 Equity Multiplier 0.00 30.18 17.28 21.78 13.43 57.80 15.97 51.40 13.09 22 25 10.68 28.90 28.17 30.57 Effective Tax Rate 19.81 7.34 11.60 15.02 11.58 67.45 11.36 15.48 6.88 7.40 20.42 14.90 44.03 40.83 2.43 3.21 1.30 1.52 0.21 1.30 0.74 0.04 0.24 0.25 0.06 0.16 11.88 5.63 3.18 2.32 0.39 2.22 0.06 1.83 0.18 0.04 Gross Margin Net Margin Total Asset Turnover 0.28 Inventory Turnover Receivable Turnover Payable Turnover 32.33 41.53 51.00 39.54 0.19 0.38 0.27 22.23 27.93 18.64 28.67 8.85 4.37 21.40 35.10 107.04 64.08 0.91 0.18 0.20 0.05 0.06 0.09 25.79 24.51 0.29 Bukit Sembawang Estates City Developments Ltd Frasers Centrepoint Limited Global Logistic Properties Hongkong Land Holdings Ltd Pollux Properties Ltd Sinarmas Land Ltd Tuan Sing Holdings Ltd UIC-United Indust Corp Ltd UOL Group Ltd Wheelock Properties (SGP) Wing Tai Holdings Ltd Yanlord Land Group Ltd Yuexiu Property Co Ltd 0.17 53.79 24.71 65.93 16.90 45.26 48.08 78.19 41.48 35.46 28.89 17.20 51.84 78.21 34.20 39.86 13.07 20.27 0.07 0.10 0.03 0.27 0.33 0.09 0.80 0.59 0.37 0.58 0.03 0.60 0.25 0.25 38.69 3,378.08 100.13 8.74 10.05 3.87 65.19 18.48 250.18 825.21 2.99 9.72 19.08 7.44 5.80 2.00 9.97 34.31 3.50 330.36 0.18 0.18 Page 11 9B19N012 EXHIBIT 7: (CONTINUED) ROA P/B PIS 8.52 1.59 ROE 10.19 9.37 13.93 8.48 5.18 2.72 PIE 16.03 12.97 8.25 15.10 11.07 4.14 6.94 5.10 3.67 1.18 0.42 1.43 1.20 0.52 0.98 15.39 7.47 4.49 3.65 4.33 0.08 7.81 3.29 5.05 1.03 Bukit Sembawang Estates City Developments Ltd Frasers Centrepoint Limited Global Logistic Properties Hongkong Land Holdings Ltd Pollux Properties Ltd Sinarmas Land Ltd Tuan Sing Holdings Ltd UIC-United Indust Corp Ltd UOL Group Ltd Wheelock Properties (SGP) Wing Tai Holdings Ltd Yanlord Land Group Ltd Yuexiu Property Co Ltd 1.24 0.20 19.81 7.14 8.54 12.18 0.47 1.16 8.72 4.00 7.86 1.09 11.82 2.55 3.89 6.87 12.97 6.07 50.60 3.02 7.77 1.89 4.62 17.32 1.21 1.31 20.94 8.60 12.43 0.82 0.71 0.88 0.57 0.84 0.08 1.01 0.13 Note: All data as at the respective companies' FY2013 year-end dates; for companies with reporting currencies other than SGS, figures are converted to SG$ using the applicable year end closing rate from XE.com. Source: Created by the case authors using data from Bukit Sembawang Estates, Home for Every Generation: Annual Report 2013, accessed January 27, 2017, www.bukitsembawang.sg/investor-relations/annual-report, City Developments Ltd. 50 Golden Years: Annual Report 2013, accessed January 27, 2017, www.cdl.com.sg/annualreport2013/corporate_network.html: Frasers Centrepoint Limited. Creating Value ThrsGough Space: Annual Report 2013. accessed January 27, 2017 http://infopub.sgx.com/Apps?A=COW_Prospectus_content&B=AllAnnual ReportByDate&F=19473; Global Logistic Properties. Right Time, Right Place, Right People: Annual Report 2013, accessed January 27, 2017 http://i.giprop.com/phoenix zhtml?c=240724&p=irol-reportsannual: Hongkong Land Holdings Ltd, Annual Report 2013 accessed January 27, 2017. www.hkland.com/data/media_releases/results_announcements/2013/ar2013.pdf. Pollux Properties Ltd. Annual Report 2013. accessed January 27, 2017. http://pollux.com.sg/singapore/ar/pollux_ar2013.pdf Sinarmas Land Ltd, Building for a Better Future: Sinarmas Land Annual Report 2013, accessed January 27, 2017 http://infopub.sgx.com/FileOpen/Sinarmas%20Land%20Limited%20Annual%20Report%202013_low%20res.ashx?App=Pro spectus&FilelD=20925; Tuan Sing Holdings Ltd, 2013 Annual Report accessed January 27 2017. www.tuansing.com/Investor Relations/ReportDownload.aspx?RID=1&Year=2013; UIC-United Industrial Corp Ltd. Annual Report 2013. accessed January 27, 2017, www.uic.com.sg/system/misc'ar2013.pdf, UOL Group Ltd, Creating Value, Shaping Future: Annual Report 2013. accessed January 27, 2017, www.uol.com.sg/investors_and_media/annual_reports: Wheelock Properties, Audited Results for the Year Ended 31 December 2013, accessed January 27, 2017 www.wheelockproperties.com.sg/pdf/WPSL_ANN_Results_311213.pdf, Wing Tai Holdings Ltd, Celebrating Our Winning Partnerships: Annual Report 2013 accessed January 27 2017 www.wingtaiasia.com.sg/uploadfiles/1_%20Annual%20Report%202013(1).pdf: Yanlord Land Group Ltd, Expanding Our Presence: Annual Report 2013. accessed January 27, 2017, http://yanlord listedcompany.com/misc/ar2013.pdf; Yuexiu Property Company Ltd. Annual Report 2013 accessed January 27 2017 http://file.irasia.com/listoo/hk/yuexiuproperty/annual/2013/ar2013.pdf. Page 12 9B19N012 EXHIBIT 8: KEY FINANCIAL DATA OF POTENTIAL PEERS Company Financial Year End Month Share Price (SGS) 5.420 9.600 Cost of Equity (%) 1.700 Bukit Sembawang Estates City Developments Ltd Frasers Centrepoint Limited Global Logistic Properties Hongkong Land Holdings Ltd Pollux Properties Ltd Sinarmas Land Ltd Tuan Sing Holdings Ltd UIC-United Indust Corp Ltd UOL Group Ltd Wheelock Properties (SGP) Wing Tai Holdings Ltd Yanlord Land Group Ltd Yuexiu Property Co Ltd March December September March December March December December December December December June December December 2.650 5.900 0.079 0.480 0.300 2.970 6.190 1.695 1.970 1.225 0.058 Shares Outstanding (millions) 258.911 909.301 2,899.996 4,743.686 2,352.800 627.115 4,255.862 1,182.800 1,419.089 804.611 1,196.560 772.509 1,941.586 9,322.031 Sales (SG$ millions) 281.997 3,905.453 3,439.592 960.183 2,473.395 48.271 878.388 404.018 1,036.584 1.410.558 769.673 544.390 5,351.540 4,352.023 Earnings (SG$ millions) 91.979 653.224 597 219 904.823 4,151.022 1.656 114.908 33.585 286.045 287.040 58.349 7.079 562.453 321.153 Book Debt (SG$ millions) 0.000 5,737.767 9.795.537 6,002.647 4,858.221 53.930 1,358.917 1,020.793 1,241.628 2,409.443 0.000 1,376.506 4,726.304 8,401.949 Cost of Debt (%) 0.000 2.178 2.239 2.207 2.261 2.014 2.451 2.660 1.198 2.267 0.000 1.749 1.474 2.312 Book Equity (SG$ millions) 1.289.832 11,408.684 11,843.484 16,559.382 38,844.924 50.784 3,855.296 930.456 7,035.062 8,635.364 2,989.286 3,332.526 6,257.589 7,170.139 6.530 8.427 6.257 9.488 10.629 8.091 8.130 7.101 5 206 8.691 7.043 7.308 6.728 10.477 Page 13 9B19N012 EXHIBIT 9: PRECEDENT TRANSACTIONS Announce Date Deal Description Target Name Target Country Acquirer Name Announced Total Value (US$ millions) Announced Premium Price Legacy Corp. United States PL Retail LLC 1.241.1 2.8% Kramont Realty Trust United States CNPR Group 1.103.9 17.1% Pan Pacific Retail Properties Inc. United States Kimco Realty Corp 3,867.5 1.3% This document is authorized for use only by NESLIHAN YILMAZ in 2019. Heritage Property Investment Trust Inc United States CNPR Group 3.203.7 PL Retail LLC acquired Price Legacy Corp. for US$1,241.08 million. The transaction was August 24, 2004 announced on August 24, 2004, and completed on December 22, 2004. CNPR Group acquired Kramont Realty Trust December 20, 2004 for US$1,103.89 million. The transaction was announced on December 20, 2004, and completed on April 19, 2005, Kimco Realty Corp. acquired Pan Pacific July 10, 2006 Retail Properties inc. for US$3,867.52 million The transaction was announced on July 10, 2006, and completed on October 31, 2006 CNPR Group acquired Heritage Property Investment Trust Inc. for US$3,203.71 million. July 10, 2006 The transaction was announced on July 10, 2006, and completed on October 6, 2006 DDR Corp. acquired Inland Retail Real Estate October 23, 2006 Trust Inc. for US$5,871.46 million. The transaction was announced on October 23, 2006, and completed on February 27, 2007 CNPR Group acquired Brixmor LLC for US$5,234.05 million. The transaction was February 27, 2007 announced on February 27, 2007, and completed on April 23, 2007. As of the completion date, this was CNPR Group's largest acquisition on record. Banques Populaires/France acquired Foncia Groupe SAS for 516.75 million. The April 3, 2007 transaction was announced on April 3, 2007 and completed on May 10, 2007 7.5% Inland Retail Real Estate Trust Inc. United States DDR Corp 5,871.5 21.4% Brixmor LLC United States CNPR Group 5,234.1 0.2% Foncia Groupe SAS France Banques Populaires/France 690.3 0.8% Page 14 9B19N012 EXHIBIT 9: PRECEDENT TRANSACTIONS (CONTINUED) Announce Date Deal Description Target Name Target Country Acquirer Name Announced Total Value (US$ millions) Announced Premium June 29, 2007 Landic Property A/S Denmark Landic Property hf 792.5 11.0% June 15, 2010 ECO Business- Immobilien AG Germany Conwert Immobilien Invest. GmbH 775.7 38.8% October 4, 2010 Parkbridge Lifestyle Communities Inc. Canada British Columbia Investment Management Corp 769.2 Landic Property hf acquired Landic Property A/S for DKK4,356.53 million. The transaction was announced on June 29, 2007, and completed on September 20, 2007 Conwert Immobilien Invest GmbH acquired ECO Business-Immobilien AG for 629.10 million. The transaction was announced on June 15, 2010, and completed on November 4. 2010. British Columbia Investment Management Corp. acquired Parkbridge Lifestyle Communities Inc. for CA$787.09M. The transaction was announced on October 4, 2010, and completed on January 12, 2011. A consortium led by Elbit Imaging Ltd. acquired EDT Retail Trust for AU$1,189.17 million. The transaction was announced on March 10, 2011, and completed on September 6, 2011 H&R Real Estate Investment Trust acquired Primaris Retail Real Estate Investment Trust for CA$4,049.52 million. The transaction was announced on January 16, 2013, and completed on April 9, 2013. Through the acquisition, H&R became Canada's largest REIT by enterprise value 33.4% March 10, 2011 EDT Retail Trust Australia Elbit Imaging Ltd. Plaza Centers NV. Eastgate Property LLC 1,191.2 22.6% by NESLIHAN YILMAZ in 2019 January 16, 2013 Primaris Retail Real Estate Investment Trust Canada H&R Real Estate Investment Trust 4,105.8 5.0% Note: REIT = real estate investment trust. Source: Created by the case authors using data from "Industry Codes for Shopping Mall REITS, Real Estate Management," Bloomberg L.P., accessed October 26, 2018, Page 15 9B19N012 EXHIBIT 10: VOLUME AND PRICE DATA (PRICE IN SG$) Date April 1, 2014 April 2, 2014 April 3, 2014 April 4, 2014 April 7, 2014 April 8, 2014 April 9, 2014 April 10, 2014 April 11, 2014 April 14, 2014 April 15, 2014 Straits Times Index Volume Points Traded 197,530,100 3.198.52 342,589,000 3.192.78 329,078.400 3.220.06 182.690.000 3.212.72 201,864.700 3.193.59 268,919.900 3,204.09 320,390.100 3.200.92 318,300.500 3.203.58 204,142 300 3.198.22 151,492.500 3,214.83 415,223,400 3.246.32 CapitaMalls Asia Volume Price Per Traded Share 10,032.000 1.790 16,613,000 1.760 8,902.000 1.755 5,652,000 1.755 8,235,000 1.735 6,573,000 1.750 10.054.000 1.780 34,590,000 1.805 5,153,000 1.815 1.805 183,127.000 2.190 CapitaLand Volume Price Per Traded Share 18.422.000 2.91 15.257,000 2.94 9.337.000 2.98 5.53,000 2.98 5.349,000 2.96 10.133,000 2.98 8.759,000 2.98 8,250,000 2.95 10,538,000 2.92 2.92 48,854,000 3.11 Source: Created by the authors using data from "Straits Times Index (STI), accessed January 27, 2017 https://sg.finance.yahoo.com/quote/%6ESTI; Capital and Limited (CATL.SI)." accessed January 27, 2017 https://finance.yahoo.com/quote/CATL. SI: "CapitaMalls Asia (JSS.SI)." Yahoo! Finance, accessed January 27, 2017 CAPITA MALLS ASIA: A BUYOUT OFFER FROM CAPITA LAND Ruth S.K. Tan, Zsuzsa R. Huszr, Weina Zhang, and Shao Yu Hong wrote this exercise solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G ON1; (0) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright 2019, National University of Singapore and Ivey School of Business Foundation Version: 2019-06-17 It was April 15, 2014, and trading had resumed for the shares of Capital and Limited (CapitaLand), a large, Singapore-based real estate company, and for the shares of CapitaMalls Asia Limited (CMA), a commercial property development and management company. The trading halt had been called the day before so that Capital and could announce its voluntary conditional cash offer of SG$2.222 for each share of CMA through its wholly owned subsidiary Sound Investment Holdings Pte Ltd. The intention was to delist CMA and integrate it into the Capital and Group. The offer was conditional on Capital and garnering more than 90 per cent of CMA. At the time of the offer, Capital and already owned 65.3 per cent of CMA. The cash offer of $3.06 billion for the remaining shares was 27 per cent above CMA's one-month volume-weighted average price. The per-share price in the offer was also 20.7 per cent higher than CMA's net asset value per share as at December 31, 2013, and represented a premium of 22.3 per cent over the closing price of $1.815 on April 11, 2014. The offer price would be reduced for any CMA dividends distributed on or after the announcement date, including a proposed final CMA dividend of $0.0175 per share for the financial year ending in 2013. If acceptance levels crossed the 96.5 per cent threshold, Capital and would be able to compel acquisition of all of CMA's shares. 10 As an investor in CMA, you were congratulating yourself on the unexpected windfall. However, the news also made you wonder about the intrinsic value of CMA. When trading resumed on April 15, you noted that CapitaLand's share price had also risen. Thus, not only was there a premium for the target shareholders, there was also value created for the acquiring shareholders. In fact, you could calculate the estimated synergy arising from the acquisition from the premium and the net present value of the acquisition. CAPITALAND Capital and had its headquarters in Singapore and was listed on the Singapore Exchange Limited. Its businesses in real estate and real estate fund management were focused in Singapore and China." As of December 31, 2013, the company had assets of $14.91 billion (45 per cent of the group's assets) in China, the company's largest market, and assets worth $12.52 billion (38 per cent of the group's assets) in Singapore, which was the company's second-largest market.12 Page 2 9B19N012 Following a strategic review in 2013, Capital and had been reorganized into four business units: Capital and Singapore, CapitaLand China. CMA, and the Ascott Limited (Ascott). CapitaLand Singapore and Capital and China developed residential, office, and integrated or mixed-use properties. Despite challenging market conditions, Capital and Singapore had almost doubled the number of private residential units it sold in 2012 by "right-sizing the units. CapitaLand China had refined its strategy to focus on mass market and first-time buyers and upgraders and had become the largest foreign real estate developer in China." CMA was in the business of shopping malls, and Ascott in serviced residences. CMA had achieved high shopper traffic and net property income, and in 2013, it announced a partnership to jointly develop the Jewel project at Changi Airport. 14 Ascott, which operated more than 33,000 apartment units across 82 cities in more than 20 countries," had achieved modest revenue growth in 2013.16 CAPITAMALLS ASIA LIMITED (CMA) CMA, founded in 2004, went public in November 2009 at an initial offering price of $2.12 per share and raised $2.8 billion. After this initial public offering. Capitaland's shareholding interest in CMA was reduced from 100 per cent to 65.5 per cent. When it was listed CMA was one of the largest pure-play shopping mall owners, developers, and managers in Asia. Its shares closed at $2.30 on the first day of trading. CMA used an integrated shopping mall business model, with interconnected buildings where shoppers could live, work, and play. Its primary business objective was to be a leading owner, developer, and manager of shopping malls in Asia. As of December 2013, CMA had a pan-Asian portfolio of 105 shopping malls valued at $34.3 billion.20 It had $1 billion in cash and a debt-to-asset ratio of 25 per cent (see Exhibit 1). MOTIVATION TO DELIST CMA Capital and had several reasons for delisting CMA. First, because CMA's integrated developments tended to enjoy high foot traffic from a captive base of offices and residences, the developments were expected to enhance Capitaland's competitive strengths. Second, delisting CMA would simplify Capitaland's organizational structure. Third, the delisting would give Capital and more flexibility in allocating its capital and expanding its scale.21 Fourth, it would unlock shareholder value and achieve synergies.22 CapitaLand claimed that the acquisition of CMA would immediately raise earnings per share by approximately 21.5 per cent and improve return on equity from 5.4 per cent to 6.7 per cent. However, it was not clear whether increasing earnings per share was a good reason for the acquisition President of CapitaLandLim Ming Yan, said, "The market has changed. Earlier companies were pure-play residential; now companies are emerging that are doing mixed developments, which include homes, offices, and malls. This move will help us compete better."24 According to an analyst at Barclays Plc, "Capital and's offer to take CapitaMalls private is a win-win for both CapitaMalls and Capitaland. Regaining full control of CapitaMalls should allow Capital and more flexibility, including the ability to streamline its organizational structure."25 However, according to Samsung Asset Management Co. Ltd. (Samsung Assets), the transaction showed that Capital and could not put the money to better use at a time when the property markets in Singapore and China were starting to weaken. In a similar vein, an investment manager at Samsung Assets in Hong Kong commented Page 3 9B19N012 The company is effectively undertaking financial engineering to enhance returns. The problem is these returns are still unsatisfactory relative to the cost of equity and suggests a lack of investment opportunities in an adverse environment of declining property prices in Singapore and slowing growth opportunities in China. 27 FINANCIAL PERFORMANCE AND VALUATION To calculate the value of your investment in CMA, you could conduct valuations of CMA's shares using the discounted cash flow (DCF), discounted dividend model (DDM), relative valuation (RV), and precedent transaction methods. DCF valuation is based on the principle that the value of a business is determined by its ability to generate cash flows. The relationship between the business's revenue and cost drivers can be gleaned from the company's historical financial statements (see Exhibits 1-4 or refer to the student Excel worksheets "CMA Financial Statements" and "Capital and Financial Statements [Ivey Publishing product number 7B19N012]). These can be used to project a company's cash flows for the initial few years, after which a terminal growth rate can be applied in perpetuity (see Exhibit 5 or refer to the Excel worksheet Information about Capital and). All projected cash flows will be discounted by the weighted average cost of capital. DCF models provide insights into the drivers of share value, but small changes in inputs can result in large changes in intrinsic value. The DDM method assumes that a stock is worth the sum of its discounted future dividend payments. The discount rate used is the cost of equity capital. For stocks with a solid history of dividend growth, it is reasonable to assume that the historical growth rate will continue for some years, after which a terminal growth rate will be applied (see Exhibits 5 and 6). The DDM is a simple and convenient way of valuing stocks, but it can be sensitive to the assumed growth rates." The RV method compares the value of a business to those of its competitors, using common multiples or benchmarks such as price-to-earnings (PE), price-to-book (PB), and price-to-sales (P/S) ratios. The P/E ratio indicates how much investors are willing to pay per dollar of earnings. It is a widely used peer multiple, but because the denominator is eamings, investors have to be careful when comparing peers from countries that are subject to different accounting regulations. In addition, PE cannot be applied if earnings are negative. The P/B ratio compares a stock's market value to its book value. The ratio is calculated by dividing the price of the stock by the book equity per share. It gives some idea of whether investors are paying a reasonable price for the equity that will be left if the company were to go bankrupt immediately. For example, a P/B ratio of less than one indicates that investors can theoretically buy up all the shares of the company, liquidate the assets, pay off the company's liabilities, and still have money left. The P/S ratio compares how much investors are willing to pay per dollar of sales. Because sales is a top-line figure and is therefore less affected by accounting policies, this is a useful multiple for businesses that have yet to generate positive earnings, and it is useful for comparing businesses that are subject to different accounting regimes. Regardless of which multiple is used, it is important to develop accurate benchmarks, and it is crucial to compare only businesses from the same industry and with similar market capitalization. Thus, although information had been gathered on a number of CMA's potential peers (see Exhibits 7 and 8 or student Excel Page 4 9B19N012 worksheets "Peer Financial Ratio" and "Other Key Peer Financial Data"), further deliberation would be required to identify a suitable comparison group. In addition to relative valuation, precedent transactions could also provide some useful information Precedent transaction analysis uses the prices paid for similar companies to estimate the worth of a target company. Under normal market conditions, transaction comparables provide higher multiple ranges than peer comparables because acquirers normally pay control premiums and strategic buyers often have the opportunity to realize synergies. To assess the value of CMA, information on 12 precedent transactions had been retrieved for consideration (see Exhibit 9, or student Excel worksheet Precedent Transactions"). PREMIUM, NET PRESENT VALUE, AND SYNERGY By the close of trading on April 15, 2014, Capital and's shares had increased 6.5 per cent to $3.11. CMA's shares had surged 21 per cent, from the closing price of $1.815 on April 11, 2014, to $2.19 (see Exhibit 10)the company's biggest gain since going public in 2009. Based on the market response, it appeared that the shareholders of CMA and Capital and clearly approved of the transaction. In fact, the net present value of the acquirer could be estimated directly from the response of CapitaLand's share price on April 15th. This, together with the premium for the target, would provide an estimation of the synergy created. Page 5 9B19N012 EXHIBIT 1: CAPITA MALL ASIA'S BALANCE SHEETS (IN SG$ THOUSANDS) 2012 2013 0 0 301.773 1.004.312 Development Properties for Sale Trade and Other Receivables Cash and Cash Equivalents Total Current Assets Plant and Equipment Investment Properties Property under Development Subsidiaries Associates Jointly Controlled Entities Other Investments Other Assets Total Non-Current Assets TOTAL ASSETS 2009 0 436,013 544,308 980,319 14,686 1.378,567 127,686 0 2.999,393 875,398 200,028 933 5,396,671 6,376,990 2010 0 498.281 1,318,312 1,816,593 13,197 304,429 288.848 0 3,119.729 1,043,656 378.653 17,072 5,165,584 6,982, 177 2011 8,827 217,862 975,479 1,202,168 16,198 618,988 1.000, 102 0 3,521,066 1.138,861 425,622 97.045 6,875,880 8,078,048 533,047 875,351 1,208,398 17.019 1,565.789 548.141 0 3,671.971 2,335 326 441.306 143.384 8,722,936 9,931,334 1,306,085 19,304 1,548,594 148,934 0 4,195,179 2,445.766 498,489 202.441 9,054,687 10,360,772 Trade and Other Payables Loans and Borrowings Current Tax Payable Total Current Liabilities Loans and Borrowings Deferred Tax Liabilities Other Non-Current Liabilities Total Non-Current Liabilities TOTAL LIABILITIES 377,622 72,155 49,111 498,888 430,738 30.065 23,845 484,648 983,536 295 396 12.260 68,102 365,758 687,892 33,121 7,378 728,189 1,093,947 213, 132 238,938 51,448 503,518 990,805 85,021 21,579 1,097,405 1,600,923 240.890 8.922 55.526 305,338 2,705,400 88.563 93.982 2,888,035 3,193,373 284, 108 157.763 54.976 496,847 2,428,283 98,524 70.416 2,595,223 3,092,070 4.605,000 735,041 4,605,000 1,223.519 4.607,514 1,619,477 4,612.590 1.877.757 4.620.971 2,542.797 5,340,041 5,828,519 6,226,991 6,490,347 7,163,768 Share Capital Other Reserves Equity Attributable to Owners of the Company Non-Controlling Interests Total Equity TOTAL EQUITIES AND LIABILITIES 53,413 5,393,454 6,376,990 59.711 5,888,230 6,982,177 250.134 6,477,125 8,078,048 247.614 6,737,961 9,931,334 104,934 7,268,702 10,360,772 Source: Created by the case authors based on information obtained from CapitaMalls Asia Limited, Clarity, Sustainable Growth: Annual Report 2013 accessed January 27, 2017, http://infopub.sgx.com/FileOpen/CMA%20AR(Final)_2013.ashx? App=Prospectus&FileID=20423: CapitaMalls Asia Limited, Extending Reach Seizing New Opportunities: Report to Shareholders 2012, accessed January 27, 2017, http://capitamallsasia.listedcompany.com/misc/2012_en/ar2012_en.pdf CapitaMalls Asia Limited, Growing Our Presence in Asia, Report to Shareholders 2011, accessed January 27, 2017 http:/infopub.sgx.com/FileOpen/CapitaMalls%20Asia%20AR%202011(FINAL_ENGLISH).ashx?App=Prospectus&FileID=92 CapitaMalls Asia Limited, Growing Our Presence Report to Shareholders 2010, accessed January 27, 2017 http://infopub.sgx.com/FileOpen/Capita Malls%20Asia%20AR%202010.ashx?App=Prospectus&FileID=10898: CapitaMalls Asia Limited, Asia's Leading Shopping Mall Developer, Owner and Manager: Report to Shareholders 2009, accessed January 27. 2017, http://infopub.sgx.com/FileOpen/CMA%20AR 2009%20PDF%20for%20Registra.ashx?App=Prospectus&FileID=7988. Page 6 9B19N012 EXHIBIT 2: CAPITA MALL ASIA'S INCOME STATEMENTS (IN SG$ THOUSANDS) Revenue Cost of Goods Sold Gross Profit Other Operating Income Administrative Expenses Other Operating Expenses Profit from Operations Finance Costs Share of Profits from Associates & Joint Ventures Profit before Tax Tax Expense Net Income Attributable to: Owners of the Company Non-Controlling Interests Earnings per Share (cents) 2009 228,946 -100.246 128,700 85,019 -70,212 -111,901 31,606 -111.430 489,507 2010 245,402 -91,803 153,599 82,447 -107,419 -1,099 127,528 -25,603 475,884 2011 246,173 -104,204 141,969 252.057 -140,401 -899 252,926 -33,312 348,945 2012 361,178 -140,380 220,789 214,677 -151,388 -4,277 279,801 -69,715 406,501 2013 380,416 -140,360 240,056 139.898 -146,725 -3.802 229,427 -74,015 524.769 409,683 -16,027 393,656 577,809 -28,871 548,938 568,559 -74,341 494,218 616,587 -57.730 558,848 680, 181 -66,054 614,127 388,098 5,500 20.1 541,337 7.601 13.0 456,008 38,210 11.7 546,018 12.830 14.0 600,008 14.119 15.4 BREAKDOWN OF CAPITA MALL ASIA'S REVENUE BY BUSINESS AND GEOGRAPHICAL SEGMENTS (IN SG$ THOUSANDS) 2009 2010 2011 2012 2013 (Business Segments) Management Business Investment Business Others Consolidation Elimination Total 166,360 135,161 2,110 -74,685 228,946 253.788 94,285 2,061 -104,712 245,402 318,372 56,224 1.748 -130, 169 246,173 258,005 109,678 102,183 -108,888 361,178 230.790 154,194 86,337 -70.905 380,416 (Geographical Segments) Singapore China Malaysia Japan India Total 84,332 62,879 2.144 79,134 457 228,946 108.679 78,680 49,520 4,699 3.824 245,402 104.047 104,412 28.876 4.433 4,405 246,173 123,038 159,990 37.570 35,630 4,931 361,178 120,007 185.179 40.581 49,259 5,390 380,416 Source: Created by the case authors based on information obtained from CapitaMalls Asia Limited, Clarity, Sustainable Growth: Annual Report 2013 accessed January 27, 2017, http://infopub.sgx.com/FileOpen/CMA%20AR(Final)_2013.ashx?App= Prospectus&FileID=20423; CapitaMalls Asia Limited Extending Reach, Seizing New Opportunities: Report to Shareholders 2012, accessed January 27, 2017, http://capitamalisasia.listedcompany.com/misc/2012_en/ar2012_en.pdf CapitaMalls Asia Limited, Growing Our Presence in Asia: Report to Shareholders 2011, accessed January 27, 2017. http://infopub.sgx.com/FileOpen/CapitaMalls%20Asia%20AR%202011(FINAL_ENGLISH) ashx?App=Prospectus&FileID=92 CapitaMalls Asia Limited, Growing Our Presence Report to Shareholders 2010, accessed January 27, 2017 http://infopub.sgx.com/FileOpen/CapitaMalls%20Asia%20AR%202010.ashx?App=Prospectus&FileID=10898: Capital Malls Asia Limited, Asia's Leading Shopping Mall Developer, Owner and Manager: Report to Shareholders 2009, accessed January 27. 2017, http://infopub.sgx.com/FileOpen/CMA%20AR 2009%20PDF%20for%20Registra.ashx?App=Prospectus&FileID=7986 Page 7 9B19N012 EXHIBIT 3: CAPITALAND'S INCOME STATEMENTS (IN SG$ THOUSANDS) 2012 Revenue Cost of Goods Sold Gross Profit Other Operating Income Administrative Expenses Other Operating Expenses Profit from Operations Finance Costs Share of Profits from Associates and JV Profit before Tax Tax Expense Profit from Continuing Operations, Net Tax Net Income Attributable to: Owners of the Company Non-Controlling Interests Earnings per Share 2009 2,957,359 -1.931,185 1,026,194 1,238,399 -412,649 -572, 121 1,279,823 -453,922 269,195 1,095,096 -86,482 2010 3,382,742 -2,106,384 1,276,358 892.687 -488.279 -117.421 1,563,345 -448,183 820,852 1,936,014 -285.907 2011 3,019,569 -1.946,684 1,072,885 713,704 -530, 187 -46,459 1,209,943 -472,785 876,646 1,613,804 -190,884 3,301,363 -2,073,289 1,228,074 586,949 -580,251 -52,122 1,182,650 -498,963 834,781 1,518,478 -201,907 2013 3,977,487 -2,891,707 1,085,780 381,127 -517,627 -198,837 750,643 -444.490 1.047.388 1,353,521 -188.008 1,008,634 1,008,634 1,670,107 1,670, 107 1,422,920 1,422,920 1,316,571 1,316,571 1,184,613 1,184,613 1,052,959 -44,325 0.2820 1,273,139 396,968 0.2990 1,057,311 365,609 0.2480 930,347 386,224 0.2190 849.795 334.818 0.2000 BREAKDOWN OF CAPITALAND'S REVENUE BY GEOGRAPHICAL SEGMENTS (IN SGS THOUSANDS) Singapore China Other Asian Countries Australia Europe and Others 2009 2010 2011 2012 2013 978.990.0 1.200,843.0 1,074,785.0 1,189.700.0 1.396,718.0 773,914.0 711,338.0 865,500.0 587,933.0 1.070,435.0 163,291.0 291,700.0 158,354.0 139,890.0 222.902.0 755.789.0 916.159.0 890,213.0 1,182.289.0 1,065,689.0 262.698.0 285,469.0 262,698.0 232.638.0 221,530.0 2,957,459.0 3,382,742.0 3,019,569.0 3,301,363.0 3,977,487.0 Total Note: JV = joint ventures Source: Created by the case authors using information from CapitaLand Limited, Clarity Insight and Foresight: Annual Report 2013, accessed January 27, 2017, https://investor.capitaland.com/misc/ar2013.pdf: CapitaLand Limited, Focus, Balance, Scale, Positioned for Growth: Annual Report 2012 accessed January 27 2017 http://investor.capitaland.com/misc/ar2012.pdf: CapitaLand Limited, The Art of Building: Annual Report 2011, accessed January 27, 2017, http://investor.capitaland.com/misc/ar2011.pdf, CapitaLand Limited, Fim Foundation: Leading Edge innovation in the First 10 Years, Ready for the Next 10 YearsAnnual Report 2010, accessed January 27, 2017 http://investor.capitaland.com/misc/ar2010.pdf; CapitaLand Limited, Ahead of the Curve, Growth during Global Crisis: Annual Report 2009, accessed January 27, 2017, http://investor.capitaland.com/misc/ar2009.pdf. Page 8 9B19N012 EXHIBIT 4: CAPITALAND'S BALANCE SHEETS (IN SG$ THOUSANDS) Development Properties Trade and Other Receivables Other Current Assets Cash and Cash Equivalents Total Current Assets Property. Plant, and Equipment Intangible Assets Investment Properties Associates Joint Ventures Deferred Tax Assets Other Non-Current Assets Total Non-Current Assets TOTAL ASSETS Trade and Other Payables Short-Term Bank Borrowings Current Portion of Debt Securities Current Tax Payable Total Current Liabilities Long-Term Bank Borrowings Debt Securities Deferred Tax Liabilities Other Non-Current Liabilities Total Non-Current Liabilities TOTAL LIABILITIES 2009 3.500,270 1,301,916 196,437 8.729,718 13,818,341 1.772,301 518,020 5,058,507 7,012,174 1.672,056 81,250 233,359 16,347,673 30,166,014 2010 5,419,350 2,139,625 203.009 7,190,064 14,952,048 1,049,407 459,805 4,732.895 8,249.142 1,861.232 308,205 87.686 16,748,172 31,700,220 2011 6.905,124 1.769,374 195.000 6.264.473 15,133,971 1.075,505 458,722 7,074.617 9.290.737 1.394,263 95,671 795,955 20,185,470 35,319,441 2012 7,510,093 1.484,753 201,370 5,497,693 14.693,909 1,263,615 462.093 7.969,402 9,692,297 2.818,985 91,595 795,713 23,093,700 37,787,609 2013 7,382.023 1,164,115 196.923 5,920,152 14,663,213 1,079.239 470.736 4,935.194 11.750.550 2,525 352 73,477 657,124 21,491,671 36,154,884 1.880,017 992,974 404,812 457,374 3,734,977 3.951,770 4.963,198 173,756 462.550 9,551 274 13,286,251 1,894 385 852,255 909,519 498,405 3,952,564 3,798,410 4,797.859 593.238 540.687 9,730,194 13,682,758 2.270,488 426.011 434,228 441,075 3,571,802 6,105,790 5,224,810 627.638 550,130 12,508,168 16,079,970 2.359,598 765,826 16,348 432,489 3,574, 259 6,817,114 6.780,492 858,989 712.971 14,769,566 18,343,825 2,680,483 939,310 254.972 472.711 4,347,476 5,421.543 5,946.962 611.133 516,827 12,496,465 16,843,941 Share Capital Revenue Reserves Other Reserves Equity Attributable to Owners Non-Controlling Interests Total Equity TOTAL EQUITIES & LIABILITIES 6.229,227 6.839,047 339,999 13.408,273 3,471,490 16,879,763 6,276,504 7,652,261 241.888 14,170.651 3,848,811 18,017,462 6,298,355 8,328,115 275,067 14.901,537 4,337,934 19,239,471 6,300.011 8,910,445 -130,048 15.080,408 4,363,370 19,443,784 6,302.207 9,429.970 335.726 16.067.900 3,243.034 19,310,943 30,166,014 31,700,220 35,319,441 37,787 609 36,154,884 Source: Created by the case authors using information from CapitaLand Limited, Clarity Insight and Foresight: Annual Report 2013, accessed January 27, 2017. https://investor.capitaland.com/misc/ar2013.pdf: Capitaland Limited, Focus, Balance, Scale: Positioned for Growth Annual Report 2012, accessed January 27 2017 http://investor.capitaland.com/misc/ar2012.pdf: CapitaLand Limited, The Art of Building: Annual Report 2011, accessed January 27, 2017, http://investor.capitaland.com/misc/ar2011.pdf, CapitaLand Limited, Firm Foundation, Leading Edge: Innovation in the First 10 Years, Ready for the Next 10 YearsAnnual Report 2010, accessed January 27, 2017 http://investor.capitaland.com/misc/ar2010.pdf: CapitaLand Limited, Ahead of the Curve, Growth during Global Crisis: Annual Report 2009, accessed January 27, 2017, http://investor.capitaland.com/misc/ar2009.pdf. Page 9 9B19N012 EXHIBIT 5: OTHER INFORMATION ABOUT CAPITALAND AND CAPITA MALL ASIA Cost of Debt Cost of Equity Beta Number of Shares Terminal Growth Rate (assumed) CapitaLand 2.3244 11.95745003 1.144 4,255,980,000 CapitaMall Asia 2.5842 8.44892252 0.870 3,909,675,000 3% Dividend History Payout Ratio (%) CapitaMalls Asia Year 2006 2007 2008 2009 2010 2011 2012 2013 Payout Ratio* (%) CapitaLand 32. 1673 15.2538 23.5455 42.3568 17.9704 32.1098 31.9881 9.9975 18.4164 25.5478 23.1494 22.6997 42.2338 Note: Payout Ratio = Dividend = Net Income Source: Created by the case authors using data from "Capital Malls Asis (SG1205950543)," and "CapitaLand Limited (SG1J27887962)." Compustat Capitall, accessed January 27, 2016 EXHIBIT 6: HISTORICAL AND FORECASTED GDP GROWTH RATES (IN US$ THOUSANDS) 2011 2012 Forecasted 2016 2013 2014 2015 201