Making sense on SM consolidation

The board of SM investments (SM) and SM Prime Holdings, Inc. (SMPH) approved on May 31, 20132 the consolidation of property related business of SM under SMPH. [1]

Steps to be taken:

  1. SMPH is to issue shares for all the shares of SMDC and HP (share for share swap). SMPH is then to swap HP and SMDC shares to SM Land, a private company owned by the Sy family, for the SMPH shares held by SM land.SM1SM2
  2. SMPH and SM land merger (most likely through share for share swap) with SMPH as the surviving company.SM3
  3. Assets for share swap for all other real estate assets of the SM group.SM4

How an investor can take advantage on the possible market inefficiency when the trading suspension is lifted this Monday?

An investor can take advantage of the prices of HP, SMDC, and SMPH if it goes below the value the management assumed as the basis for the consolidation.

In order to determine the value that the management assumed as the basis for the consolidation, it is important to determine how the swap rates are calculated. For this, I used a simple algebraic equation to derive the swap rate for HP and applied the same formula for SMDC. Below is my calculation:

SM5

In a disclosure, 1 HP share and 1 SMDC share will be swapped for .135 [2] and .472 [3] SMPH share respectively. Using per share valuation of SMPH and the independent valuation of HP and SMDC by Manabat Sanagustin and Company of CPAs (MS & Co.) we can derive the following table:

Highlands Prime, Inc.

SM6

*The management assumed SMPH to be valued at P20.62 per share and HP is assumed to valued at P2.74 [6,148 / 2,246].

SM Development Corporation

SM7

*The management assumed SMPH to be valued at P20.62 per share and HP is assumed to valued at P9.85 [91,290 / 9,271].

Conclusion:

Assuming that the management’s judgement is the best proxy for a Company’s intrinsic value, SMPH, HP, and SMDC should be undervalued if the shares will trade below P20.62, P2.74, and P9.85 respectively.

Sources:

  1. Press Release: “SMIC and SM Prime announce plans to consolidate SMIC’s real estate businesses,” http://www.pse.com.ph/resource/disclosures/2013/pdf/dc2013-4518_SM.pdf
  2. Tender Offer Report filed by SM Land, Inc. re: offer to acquire up to 100% of outstanding common shares of HP, Item 1, Paragraph 4, p.3, http://www.pse.com.ph/resource/corpt/2013/HP_191_05312013.pdf
  3. Tender Offer Report filed by SM Land, Inc. re: offer to acquire up to 100% of outstanding common shares of SMDC, Item 1, Paragraph 4, p.3, http://www.pse.com.ph/resource/corpt/2013/SMDC_191_05312013.pdf
  4. Tender Offer Report filed by SM Land, Inc. re: offer to acquire up to 100% of outstanding common shares of HP, Executive summary 2.1, p.39, http://www.pse.com.ph/resource/corpt/2013/HP_191_05312013.pdf
  5. Tender Offer Report filed by SM Land, Inc. re: offer to acquire up to 100% of outstanding common shares of HP, Executive summary 2.2, p.40, http://www.pse.com.ph/resource/corpt/2013/HP_191_05312013.pdf
  6. Tender Offer Report filed by SM Land, Inc. re: offer to acquire up to 100% of outstanding common shares of SMDC, Executive summary 2.1, p.38, http://www.pse.com.ph/resource/corpt/2013/SMDC_191_05312013.pdf

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell.

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11 thoughts on “Making sense on SM consolidation

  1. Pingback: Stock thoughts: APX, SMPH | Fundamental Enthusiast

  2. Somewhere in the tender offer report of SMDC, it says that SMPH shares will be crossed @ 18.66 while SMDC shares will be crossed @ 8.30. These two prices give the exchange ratio of .472. So what were you talking about? I think what’s more relevant is the arbitrage opportunity that SMDC now offers. If SMPH stays at 19.50, an SMDC stockholder would receive about 9.20 for each SMDC share owned (19.50 x .472). That’s a big premium of 15%. Also relevant is whether SMPH overpaid for the real estate that SMIC swapped in exchange for shares.

    Reply
    • Hello NF,
      The P18.66 and P8.30 for SMPH and SMDC is referred as “crossing price” and is determined by computing the 1-month weighted average price. P.14, http://www.pse.com.ph/resource/corpt/2013/SMDC_191_05312013.pdf

      Computation of the swap rates is different and the post is all about that. :)

      If you are so convinced that the crossing price is the basis for the swap rates, try deriving the swap rates for HP and SMDC using those figures.

      With regards to arbitrage, the SMPH-HP-SMDC is not a cut-and-dry arbitrage play because what is tendered is not cash but an asset that will also change in price.

      ***********
      (for other readers: Arbitrage opportunity in merger situations is the discrepancy of the value paid to a stock and the current market price)
      Example:
      A-B merger
      A announced a trading halt and disclosed that they bought 100% of B for P3/sh. All share holder of B will be paid P3/sh after 5 days.

      In the next trading day, B’s stock is trading at P2.00. in this case, there is an arbitrage opportunity and an investor can profit P1/sh after 5 days.

      If in the next trading day, B’s stock is trading at P5.50. There is no arbitrage opportunity.
      ***********

      How would an investor determine that there is a valid arbitrage play if the consideration given is an asset that changes in price?
      Focus on the intrinsic value of the asset given.

      How do we determine the intrinsic value SMDC-HP-SMPH?
      There are many ways to determine the intrinsic value (discounted cash flow method, relative valuation, capital asset pricing method) but considering that most of the assets to be infused in SMPH is not publicly available for analysis, in my opinion, the best way to determine the intrinsic value is MANAGEMENT’S JUDGEMENT.

      How do we determine the Management’s Judgement for the intrinsic values?
      The management’s basis for SWAP RATES.

      Reply
  3. Ok that’s good to know.

    Pero their goal is to buy 100% of SMDC common shares diba? So does that mean they will have to buy SMDC shares for cash eventually?

    Thank you.

    Reply

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