The commercial property sector has awoken from its stock market slumber.
It has been roused to life by news of a takeover approach for Capital Shopping Centres, which owns some of the UK’s largest shopping malls including Lakeside in Thurrock, MetroCentre in Gateshead and the Arndale Centre in Manchester.
The approach has been made by Simon Property Group, the largest real estate company in the US, and throws into doubts plans by CSC to buy the Trafford Centre, the giant shopping mall near Manchester currently owned by John Whittaker, one of the UK’s wealthiest entrepreneurs.
Now, SPG interest only came to light in the paperwork accompanying the proposed acquisition.
From the Trafford Centre deal announcement:
Recent developments
Simon Property Group, a 5.6 per cent shareholder in the Company, was contacted on 23 November 2010 regarding the Acquisition and the Placing. Simon Property Group requested in a letter to CSC received on 24 November 2010 that CSC not proceed further with the Acquisition and the Placing until it had had the opportunity to present CSC with a potential cash offer for the Company at an unspecified premium to Net Asset Value.The letter did not contain any offer or indicative offer nor provide any certainty that an offer would be made. The Board of CSC has concluded that it is not in Shareholders’ interests to delay the Placing and has determined to proceed with the Acquisition and the Placing. Shareholders in the Company will have an opportunity to vote on the Acquisition at the Extraordinary General Meeting which is expected to be convened for 20 December 2010. This has been communicated to Simon Property Group.
And the Trafford Centre deal has received a lukewarm response from the City, largely because it was seen in some quarters as expensive and CSC tacked a £230m equity fund raising onto it.
Some analysts accused the company of using the acquisition as a smokescreen for a cash call.
Ahmed Motara Deutsche Bank:
On an acquisition price at a 3% discount to the expected external GBP1.65bn valuation, the net initial yield equates to 5.17% and a NEY of 5.75%. With CSC’s 1H10 portfolio initial yield at 5.35% and NEY at 6.52%, the potential price being paid for Trafford Centre appears expensive. Westfield recently sold 50% of Stratford at a guaranteed yield of 5.5%. There are material shareholding ramifications, with Peel holding potentially 25% of CSC upon completion of the acquisition. Board representation would involve John Whittaker (Peel Chairman), joining the CSC board as a non-executive and Deputy Chairman.
Michael Burt of Execution Noble:
Capital Shopping has known for some time that it would need to reduce its loan to value ratio from 53% at June 2010 to closer to the REIT sector average of 42%. The company has not appeared willing to pursue de-gearing through disposals, which could have proved dilutive to EPS and NAV and therefore returning to shareholders for additional capital feels like an unsurprising if unsatisfactory solution. Capital Shopping will now have tapped its shareholders for equity three times since the start of 2009 (only SEGRO of the REITs has raised capital more than once over the same period and its second issue was for its Brixton acquisition).
(Note: Peel Holdings is the investment vehicle of John Whittaker).
So what are the chances of CSC forcing through the Trafford Centre purchase against the wishes of SPG at the extraordinary general meeting on December 20th?
Well, CSC founder and 14.6 per cent shareholder Donny Gordon is supportive of the deal and in the past he has shown no desire to the sell either CSC or its sister company Capital & Counties.
As for CSC’s other shareholders, they are a mixture of long only UK funds and South African investors. The newly demerged Australian Westfield Shopping Centre LPT also owns a 3 per cent holding.
From Bloomberg:
Of course, there is no guarantee that SPG will make an offer and this could just be a tactic to block the Trafford deal, which will see the secretive Whittaker emerge with a 25 per cent stake and board representation.
That said, CSC would be a good way for SPG, valued at $30bn on the New York stock exchange, to gain a foothold in the UK market , so perhaps it is serious.
Either way, it’s focused attention back on the UK property sector.
Update: 10.32am (GMT).
Execution’s Burt reckons SPG has been shocked into action by the expensive Trafford Centre deal but says the American’s would have to offer at least 400p a share to get shareholder backing for a takeover.
The timeline of events surrounding the approach from Simon (informed of the Trafford deal on 23 Nov, wrote to Capital Shopping a day later) and the limited detail provided in its letter to the company (“a potential cash offer…at an unspecified premium to NAV”) suggests to us that Simon is still to conduct any meaningful due diligence to enable it to proceed with an offer. The EGM to approve the acquisition of the Trafford Centre is set to complete on 20th December, which provides only a limited amount of time in which Simon could make a firm cash offer to head off the acquisition. The Trafford deal will increase CSC’s market capitalization and hence the cheque Simon would have to write to acquire the business from £2.5bn to £3.1bn (EV will increase from £4.9bn to £6.5bn). Successful completion of the Trafford Centre transaction may not rule out the possibility of a bid for the larger vehicle but it does raise the financing burden for Simon.
The premium to NAV required to take out the business, will reflect the opportunity cost of CSC shareholders taking lower yielding cash versus retaining their interest in CSC shares yielding a dividend of 4.4% plus the prospect of capital growth from the current point in the investment cycle. A premium of less than 10% to June 2010’s NAV of 368p is unlikely to encourage shareholders such as the Gordon family (14.6% stake) to part with the shares in our view or defer the Trafford Centre acquisition. For institutional investors in the UK, CSC represents only 1 of 4 FTSE 100 REITs and seeing it go private would further reduce their ability to participate in prime UK real estate in a liquid vehicle. Looked at another way, replicating a portfolio of CSC’s scale would be impossible for Simon or any other bidder and therefore an offer would need to be pitched at a respectable premium to NAV to reflect the scale benefits from a £4.9bn of shopping centre portfolio with debt in-place at an average maturity of > 6 years. Any offer would need to start with a “4” to ensure shareholder support (shares trading +8% at 366p).
Meanwhile, Nomura reckons SPG’s approach will kick off an auction for CSC:
We think Simon Property Group (5.6% shareholder) and (the newly demerged) Australian Westfield Shopping Centre LPT (still holds just under 3%) may start a Dutch auction for the business after SPG’s letter delivered to the CSC board late last night. Thanksgiving day today may delay a response as US markets are closed, but expect a response.
Related link:
CSC advances on £1.6bn Trafford Centre – FT