HNA Is Temasek's Spendthrift Brother From Another Mother
(Bloomberg Gadfly) -- There's a certain through-the-looking-glass quality to news that Temasek Holdings Pte is planning to invest in two airline businesses owned by HNA Group Co.
Temasek is considering buying stakes in Swissport Group and Gategroup Holding AG, Joyce Koh, Vinicy Chan and Manuel Baigorri of Bloomberg News reported Thursday, citing people with knowledge of the matter.
Superficially, the two Asian groups have much in common.
Temasek is a state-owned Singaporean investment firm that's nonetheless jealous of its formal independence, with $320 billion of assets mostly spread between financial services, real estate, transport and telecommunications. HNA is an independent Chinese conglomerate that's nonetheless oddly entangled with the state, with $192 billion of assets mostly spread between financial services, real estate, transport and tourism.
There are even distinct synergies between the Swiss-based HNA businesses and Temasek's existing portfolio, after the companies signed a memorandum of understanding at the Boao Forum in HNA's home province of Hainan this week.
Gategroup and Swissport are the biggest airline-catering and airport ground-handling businesses worldwide. While SATS Ltd. -- the Singaporean aviation-services business in which Temasek has a 40 percent stake -- is notably smaller than either, combining its operations with the HNA assets would result in a significant consolidation. Ground handling is a fragmented market, but in airline catering the resulting 35 percent market share would be getting pretty close to global dominance.
That's where the resemblance ends, though. While Temasek has spent 44 years growing its portfolio, funded in large part by cash flows from its original endowment of Singaporean state monopolies, HNA has been in a hurry, and has taken the short cut of using debt.
As a result, while Temasek had about twice HNA's assets in its most recent financial statements, the Chinese group had more than double the net debt. Borrowing is equivalent to about 15 percent of Temasek's equity and hasn't risen above 20 percent in almost a decade, whereas the measure at HNA didn't drop below 100 percent between 2009 and 2016.
Weighed down by the burden of managing its Singapore state inheritance, Temasek hasn't always been an impressive investment performer. Total shareholder returns have amounted to a spare 4 percent over the past decade, well below a weighted average cost of capital that Bloomberg estimates at 10.6 percent. A quick-and-dirty comparison with other alternative asset managers using returns on equity paints the same picture -- but HNA is even weaker.
There's a lesson in that. For all its underperformance, Temasek doesn't tend to overpay for assets, spending about 8.5 times Ebitda in the 55 deals for which Bloomberg has data, compared to a median of 9.2 among all transactions globally over the past decade. HNA's 13.4 multiple, on the other hand, is the hallmark of a business with more money than sense.
The real question for any pending investment in Gategroup and Swissport will be the price Temasek pays. Should it choose to curry favor by meeting the rich valuations that HNA had hoped to obtain from canceled IPOs of the companies, it will be wasting the Singaporean government's money and rewarding the Chinese group's short-sightedness with a bailout.
If Temasek drives the keen bargain you'd expect from an acquirer putting cash into a business in financial straits, it will help its own performance at the same time as schooling a younger counterpart in the art of the deal.
The economic essayist Walter Bagehot once exhorted central banks facing liquidity crises to lend freely against good collateral, but demand high rates. An investment in Gategroup and Swissport would answer the first part of that formula. Whether the decision is worthwhile will ultimately depend on price.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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