Keppel Corp’s proposed acquisition of European real estate manager, Aermont Capital, marks yet another pivotal step in the former’s transformation to become a global asset manager and operator.
“The acquisition of Aermont is a significant step forward in Keppel’s ambition to be a global asset manager and operator. Aermont will be Keppel’s European real estate platform. This will give us an immediate and strong foothold in Europe, significantly expanding our presence beyond Asia Pacific, and also bolster Keppel’s value proposition to global limited partners (LPs),” says Keppel CEO Loh Chin Hua at a briefing on Nov 29. “Keppel will also be able to widen our network of blue-chip LPs leveraging Aermont’s longstanding relationships with its [over 50] global clients.” Most of Aermont’s LPs are new to Keppel. They include public pension funds, sovereign wealth funds and endowments and foundations from Europe, North America, Asia and the Middle East.
In addition, Loh sees “very little overlap” between both portfolios, noting that the Aermont portfolio will be a “strong addition” to Keppel’s current focus in Europe, which is mainly on renewables and data centre assets. “While real estate is an area that Keppel is very familiar with, we have not had a significant presence in this asset class outside of the Asia Pacific (Apac),” he says.
Established in 2007, Aermont is an independent asset management business that focuses on real estate and real estate-related investment activities in Europe. It is the highest-ranked real estate firm among its Europe-based peers by real estate news publication PERE in 2023 in terms of funds raised in the last five years.
The proposed acquisition, which was announced on Nov 29, will happen in two phases. The first phase will see Keppel acquiring a 50% stake in Aermont for a consideration of up to $517 million (or around EUR356 million, based on an exchange rate of EUR1 to $1.45). The consideration, which will be funded through a mix of cash and treasury shares acquired through Keppel’s earlier share buyback programme, implies a valuation of 13x EV/Ebitda. Although this translates into around $40 million, based on FY2022 financials, Aermont adds $9 million to Keppel’s FY2022 net profit on a pro forma basis.
Information on the performance of Aermont is scant on Bloomberg. However, Aermont’s chairman, Leon Bressler, says that the net internal rate of return (IRR) for the funds are in the teens, with the net IRR of Fund III at 32 times. Aermont manages four active funds and one asset vehicle and its assets under management (AUM) stands at around $24 billion.
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Acquisition ‘immediately accretive’ to earnings
The initial acquisition is expected to take place by 1H2024 and is expected to be immediately accretive to Keppel’s earnings, says Loh. “It would contribute to Keppel’s recurring income and funds under management (FUM), with an approximate one percentage point impact to the company’s net gearing on a pro forma basis.”
Assuming that up to EUR154 million ($224.9 million) of the consideration for the first phase of the acquisition is funded in Keppel treasury shares and assuming that the first 50% stake was completed on Dec 31, 2022, Keppel’s earnings per share (EPS) would have risen to 52.4 cents from 52.1 cents. Its recurring income would have been up to $512 million from $503 million. Its net tangible assets (NTA) per share would have risen to $5.50 from $5.49. Meanwhile, its net gearing would also have increased by one percentage point to 0.79x from 0.78x.
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Keppel’s share price depends on the 30-day volume-weighted average price (VWAP) transacted preceding the Phase 1 closing date in 1H2024. The current share price of Keppel is above its net asset value (NAV) of $6.11 and NTA of $5.23. As it stands, the acquisition would be NAV-accretive based on 50% cash and 50% equity.
The acquisition of the remaining stake will take place in 2028. The maximum consideration payable by Keppel to the Aermont sellers for Phase 2 is EUR575 million comprising cash and/or ordinary shares based on the 30-day VWAP prior to the Phase 2 closing date in 2028. The Phase 2 closing is also subject to a number of conditions including appraisal by the European Commission.
‘Highly synergistic’ acquisition
The proposed acquisition was deemed a “highly synergistic” one with both parties highlighting their shared values.
“The attraction of Keppel for us is clearly the industrial roots of Keppel, the entrepreneurial spirit of the company, and the fact that they have been able to combine operational expertise and asset management. What is particularly of interest to us is, honestly, the expertise of Keppel in the big megatrends of the next 10 or 15 years, in connectivity, energy transition and infrastructure, where we believe that together we can make Aermont a bigger and better firm for the benefit of all our stakeholders, particularly our LPs, and also our team, which will have a broader horizon. That is something very important,” says Bressler.
“Keppel has a very entrepreneurial spirit. Every time that we come across a group like Aermont, it reminds us of our entrepreneurial roots, and I think this is something that my colleagues and I would like to remain in touch with. We see this as a positive reinforcement, and it goes beyond the strategic rationale for coming together,” adds Keppel’s Loh.
Going by Keppel’s share price performance as at Nov 30, which rose by 2.8% steadily to $6.61 at the mid-day break and closed 3.73% higher at $6.67, investors would agree that the acquisition is a positive for the group.
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Upon the completion of the first phase of the acquisition, Keppel’s FUM will grow by an initial $24 billion to over $77 billion compared to its current FUM of just over $53 billion. Keppel has an FUM target of $100 billion in 2026.
Analysts positive on ‘A-star’ deal
During the question-and-answer session, a couple of analysts sounded sceptical on the synergies. Nonetheless, analysts’ reports following the briefing are positive, with some saying the acquisition is an “A-star” deal with unchanged “buy” calls and target prices on Keppel.
The team at DBS Group Research has called the acquisition a “positive surprise” and notes that it will be “well received” as expectations of Keppel’s ability to grow its FUM has turned “more modest” in recent times due to constraints of deal flow from the high interest rate environment.
“Aermont Capital will provide an immediate and significant presence in Europe, which will fulfil a gap in asset management expertise in Europe, which is complementary to the group,” says the team, noting that the acquisition puts Keppel in “good stead” to achieve its $100 billion FUM target by 2026.
The team also sees “potential synergies” between Keppel and Aermont Capital, with the former targeting to accelerate Aermont Capital’s FUM to $60 billion through the launch of new fund products and strategies. The figure is 2.5 times higher in the medium term.
Furthermore, the transaction multiples appear to be fair.
“According to Deloitte, we understand that historical transaction multiples range between 11 times and 12 times on an ebitda basis or a Price/FUM ratio of [around] 2.0% to 2.5%. That said, if we take into account the potential FUM growth potential of up to $60 billion in the medium term, Keppel’s acquisition transaction multiples on a Price/FUM ratio will fall within [a] transaction range of [around] 2.0%,” says the DBS team, who has kept its target price at an unchanged $8.05.
Citi’s Brandon Lee also remains positive on the proposed acquisition.
“While immediate earnings accretion is minimal, the platform expands its LP base, products and geographies, with lower FUM exposure to REITs (31% post-Aermont versus 44% now) making it less dependent on interest rate uncertainty,” he writes.
Furthermore, the analyst notes other benefits such as the immediate expansion of Keppel’s FUM by 45% to $77 billion, the expanded network of blue-chip LPs from Aermont, expanded asset management capabilities and exposure beyond Apac to Europe, a bigger suite of products to LPs and a higher potential pipeline for listed and/or private REITs and/or funds.
The exit risk of Aermont’s LPs will also be low as its existing team is likely to remain. Bressler has said that he is “totally committed”. The team is also highly incentivised via their co-investment in funds. According to Bressler, it has been “business as usual” for the team as well.
Citi’s Lee has kept his target price at $7.32.
UOB Kay Hian’s Adrian Loh sees that the acquisition arguably puts Keppel in the “league of global asset managers”.
“This acquisition will deliver growth as well as investor and geographic diversification. How the combined entity takes advantage of the macro and real estate issues in Europe over the next five years will be worth watching,” he says, with an unchanged target price of $9.09.
“Keppel currently trades at FY2024 P/E of 11.9 times and P/B of 0.9 times which we view as far from being egregious, especially considering the company’s more stable earnings stream given the divestment of its offshore marine business,” he adds.
