Industrials

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

This is where shareholders in Singapore's subway network get off. And it doesn't matter if some of them can't quite see the platform. Leaving people stranded has become a hallmark of their company's operations in recent years. Like back in January 2008, and then twice over three days in December 2011 when two passengers fainted, and again in July last year.

Meanwhile, investors who have held on to SMRT, the city's largest subway operator, since the fearful days of SARS 13 years ago have earned total returns of almost 600 percent in U.S. dollar terms, only slightly behind gains from Hong Kong's MTR Corp., which as Singapore's transport minister has himself pointed out, operates a service more than twice as reliable.

Decent Ride
Singapore subway operator SMRT has returned almost 600% since the SARS epidemic of 2003*
Source: Bloomberg
*Returns calculated since 04/30/2003 in U.S. dollar terms.

But the ride is over. State investment firm Temasek, which owns 54 percent of SMRT, has offered S$1.68 ($1.24) to buy out the remaining shares. Minority shareholders should be grateful for the 8.7 percent premium over the last closing price. Considering the island's transport regulator is taking away SMRT's trains and signaling system for S$991 million ($730 million), which -- after paying taxes and retiring debt -- won't even leave enough for a special dividend, the rump isn't worth much more.

Besides, as Smartkarma strategist Crispin Francis notes, the Land Transport Authority's nationalization plan will see SMRT having to share with the government the outsize profit margin of about 60 percent it earns from rental income and advertising. That would be in exchange for a boost to the profitability of its core rail operation business, from a measly 1.1 percent to a more respectable 5 percent. Hardly a sweetheart deal.

Sharing Juicy Bones
Some 76 percent of SMRT's Ebit comes from rentals and advertising, which may have to be shared with the government
Source: Bloomberg
* MRT and LRT stand for mass rapid and light rail transit.

Temasek, though, should still come out okay. It owns 41 percent of the nation's largest property developer CapitaLand, 25 percent of retailer A.S. Watson, and all of MediaCorp., the Singapore broadcaster with a large outdoor advertising arm.

As Singapore upgrades its rail network to close the gap with Hong Kong, the value of the city-state's droopy residential property could get a lift; there would be more underground locations for retail; and plenty of new walls for LCD displays. Temasek will indirectly reclaim at least some of what SMRT's other shareholders will lose from nationalization. Since a part of Temasek's returns are used to finance the government's budget, this will complete a virtuous cycle.

Maintaining the status quo would have created a vicious cycle. Private capital is loath to finance massive investments from which gains are likely to be so diffuse they can only be captured by a government or large, diversified investor such as Temasek. So while it's been a good ride for SMRT shareholders, it's time they got off. They can use the S$1.68 they're getting for their shares to hail a ride home.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net