A tale of two companies

Yesterday, Singapore’s exchange market was rife with speculation about a possible merger of the two land transport giants: ComfortDelGro and SMRT. As a result, their share prices skyrocketed between 5.9% and 6.6% at closing.

ComfortDelGro is the “world’s second largest public listed land transport company with a fleet of more than 40,000 vehicles”. It is the parent company for Comfort and SBS Transit which are the market leaders in taxi and bus industry in Singapore respectively. SMRT, the market leader for train services, is a multi-modal public transport company offering train, bus and taxi services, as well as expertise in consultancy and project management in railway systems. Both companies have advertising arms.

In a newspaper report by The Straits Times (attached below), it was reported that ComfortDelGro has submitted a position paper to the Ministry of Transport, giving their two-cent worth on how the public transport industry should be structured. Two specific suggestions are given: to merge with rival SMRT to create one big giant transport company, or to have two separate companies with different areas of expertise – one running buses while another operating trains. (Note: It should be quite obvious that SBS Transit will be the natural bus company and SMRT will be the train company).

It is not hard to fathom why ComfortDelGro is keen to push for the two scenarios because they will have the upper hand in both scenarios. For the first scenario, if they were to merge with SMRT, it would most likely to be a take-over exercise rather than merger. With a market capitalisation of S$4.8 million over SMRT’s S$2.6 million and a ferocious appetite for aggressive acquisition, it would be quite unthinkable that they are willing to “merge” with SMRT. I speculate that they would have said something like this in their position paper:

Having a one giant company would create a company that can offer a holistic transport solution to Singapore with economy of scale. Also, by taking over merging with SMRT, we will hasten the process of achieving our mission of creating the world’s number one land transport operator. This would be Singapore’s pride: the largest land transport operator which is profitable.”

For the second scenario, though left with buses only, they will be able to use buses to compete with the trains by offering point-to-point services and direct bus services which are what the passengers wanted – faster and more direct services without the hassle of transfers.

Hitherto, SMRT has not yet put forth any position paper. Judging by their rival’s move, I would think they would be forced to come out with one. Already, they are managing shareholder and market’s expectation by responding to media about the position paper submitted by ComfortDelGro. A day after the news was reported, SMRT responded:

“(SMRT) Having operated trains and buses for over five years, we have grown to understand the synergistic benefits of a multimodal model. This is our preferred mode.”

What could we read from this statement? It could mean that they are supportive of the merger to create one big giant company, but this is quite unlikely as they will be a takeover subject. Another possibility is that they are against the one-bus-one-rail industry structure advocated by their rival. It is not hard to think why they are against bus-rail competition because the bus company could employ a bus network strategy that degrade the attractiveness of feeder buses to train stations while offering direct trunk services that offer door-step services or point-to-point services to compete with the trains (which SBS Transit is already doing so by replacing feeder services with passing through trunk services). Without the support of feeder buses, the trains will be left with pockets of small catchments area around the train stations.

What then is the government preferred industry structure? Minister for Transport Raymond Lim had previously state that there is no sacred cow that cannot be slaughtered, but they would not be slayed for the sake of doing so. Ultimately, with a pragmatic government, what is more important is to find solutions that achieve the outcome they want, rather than be engaged in an academic argument that debate which theoretical model best fit Singapore.

So far, the Ministry has made clear that in the next 10 to 15 years, the key solution to land transportation is to make public transport more attractive. It can no longer act as a captive market which attracts users who are unable to afford a car. As part of the land transport industry review, Ministry of Transport and Land Transport Authority have lately engaged the public in first of the many focus groups. One issue touched on is the possibility of bus route-tendering system, where bus routes are centrally planned by an independent body while the operation of the routes is being awarded to bus transport companies through competitive bidding.

In light of this, you might want to add one more possible industry structure to ComfortDelGro’s list: one rail company with multiple bus companies with route tendering.

Let us continue to wait in anticipation for the final outcome of the public transport industry review.

ComfortDelGro shares climb on SMRT merger whispers

Shares in ComfortDelGro, operator of the world's second-largest fleet of buses, taxis and rental vehicles, gained as much as 6.8 per cent after a report said chairman Lim Jit Poh suggested a merger with rival SMRT Corp.

Mr Lim's other proposal reportedly was for one company to operate bus services and the other to run Singapore's subway system to boost the use of public transport. The company does not comment on market speculation, spokeswoman Tammy Tan said.

Singapore is encouraging more people to use public transport to ease road congestion. The Ministry of Transport is reviewing the public transport sector.

“This piece of news could lead to more analysts factoring in the possibility of Singapore having one operator for rail and one operator for the bus system,” UOB Kay Hian analyst Leng Seng Choon said.

Shares of ComfortDelGro gained 13 cents (5.9 per cent), to $2.33 at the close of trading, while SMRT shares jumped 11 cents, (6.6 per cent), to $1.77.

SMRT, Singapore's biggest subway operator, also provides bus, taxi and charter services.

“Having operated trains and buses for over five years, we have grown to understand the synergistic benefits of a multimodal model,” SMRT said in an emailed statement. “This is our preferred mode.” — Bloomberg

Source: TODAY, 21 April 2007

Mega-merger of transport operators or separate all-bus, all-train entities
By Christopher Tan, Senior Correspondent

TRANSPORT giant ComfortDelGro's chairman, Mr Lim Jit Poh, has made a formal proposal to the Government on restructuring the public transport industry.

The Straits Times understands he is suggesting two options:

• A mega-merger with rival SMRT to create a single public transport group, or
• Have one operator run the buses and the other, trains.

Mr Lim has in the past mooted 'inter-modal' competition between separate all-bus and all-train operators.

He submitted his paper to Transport Minister Raymond Lim, following the ministry's call six months ago for an industry review to raise public transport ridership sizeably.

The paper was mentioned in the latest annual reports of ComfortDelGro and its subsidiary SBS Transit, although its contents were not revealed.

The Transport Ministry would not say what ComfortDelGro has proposed, but its spokesman said: 'We treat these as useful inputs coming from a key stakeholder and will give due consideration as part of the ongoing land transport review.'

The ministry is expected to release results of its review by year-end.

Currently, the two key stakeholders - SBS Transit and SMRT - have bus and train operations. SBS Transit does not make much money from rail and SMRT does not make much from buses.

Caught in the middle are commuters who complain that travel in many parts of the island is far from 'seamless'.

In the present set-up, commuters find they require more transfers to get to their destinations because too many bus services were removed to avoid duplicating MRT services.

In his chairman's statement, Mr Lim said: 'I note the public calls for more competition. I also note the cry for centralised and integrated services. These are extreme positions.'

In its General Household Survey 2005, the Department of Statistics found that although buses were the public transport network's fastest way to get around, the proportion of commuters who could take a straight bus to work had fallen from 25 per cent in 2000 to 21.9 in 2005.

The proportion who had to take both bus and train went up from 13.9 to 15.1 per cent.

Asked for her comments on the two options, SMRT president Saw Phaik Hwa said it was unnecessary to overhaul the industry, but improvements could be made.

Ms Saw said a bus-versus-train set-up could mean duplication of resources and, as a result, higher fares. She also said it may not be environmentally sound.

'That's what's happening in Hong Kong, where you see buses occupying five lanes in Causeway Bay. The pollution is bad,' she told The Straits Times yesterday.

The suggestion for one operator to run all the trains was made in 2003 by former transport minister Yeo Cheow Tong, who said 'a lot of the overheads can be saved'.

He even said SMRT would be allowed to operate all future lines if it took over SBS Transit's North-East Line (NEL), which was loss-making then.

Ms Saw said she would not acquire a loss-maker.

But last year, the NEL became profitable. Asked if she would now reconsider her position, Ms Saw said: 'I don't have a problem running the NEL, but the price must make sense. It's a business deal.'

Source: The Straits Times, 20 April 2007