… but there are lots of strings attached and the bid is probably 15-20 pence short of what shareholders want.
Highlights from another letter sent by Simon Property Group (SPG) to the board of Capital Shopping Centres (CSC) on Wednesday morning:
Dear Sirs/Madam,
Indicative offer for Capital Shopping Centres Group PLC (“CSC”)
I am writing to propose a transaction in which Simon Property Group, Inc. (“Simon”) would offer CSC’s other shareholders 425 pence in cash per ordinary share.
Our interest in making an offer for CSC is, of course, not new. By making this offer on the terms outlined in this letter, we are confident that we have now answered any objections you have previously expressed. We believe that we should work together to announce a recommended offer, and would urge you to listen to calls from your shareholders – many of whom we have spoken to – opposing the Trafford Centre transaction or asking you to adjourn your forthcoming EGM.
Now, there are two ways of looking at SPG’s latest move:
- One is that SPG serious and really does want to bid for CSC, the UK’s leading mall operator.
- Or it doesn’t and this is just another attempt to scupper CSC’s proposed £1.6bn purchase of the Trafford Centre, the giant shopping centre on the outskirts of Manchester.
Note today’s announcement is not a firm intention to make an offer on the part of SPG; it’s conditional on the Trafford Centre deal not going ahead, access to satisfactory due diligence and final approval from the board of SPG, which is a huge escape chute if chairman and CEO David Simon decides he doesn’t want to bid.
Furthermore, SPG has yet to put funding in place:
Simon is an S&P 500 company with an equity market capitalisation of approximately US$34 billion. We have completed real estate acquisitions with an aggregate value of US$28 billion. We are finalising a bridge loan facility with our bankers of approximately £3 billion for the purposes of this transaction. We are confident that, subject to successful completion of due diligence, we will be able to obtain sufficient resources to satisfy our proposal in full.
But what the proposal does is put pressure on the board of CSC to postpone Monday’s shareholder meeting at which the Trafford Centre deal is subject to approval. This would give SPG time to lobby shareholders and persuade them to veto the deal.
Traders reckon an increasing number of CSC investors (both here and in South Africa) are uncomfortable with the transaction, which would see John Whittaker, the billionaire owner of the mall, emerge with a 19.9 per cent holding in the company.
Amusing picture of John Whittaker:
However, that’s not to say they want to sell the entire company to SPG.
Far from it, reckons Mike Prew of Nomura:
CSC serves as a hedging instrument due to its almost 100% sterling assets/earnings and dual listing on London and Johannesburg stock exchanges. South African exchange controls remain for institutions (less so for individuals), and the strength of the ZA Rand (10.8 to 1 GBP currently against a 12 month range of 10.8 to 12.4) offers a store of value many South African institutions would be reluctant to give up.
We estimate that 50% of the shareholder register is beneficially owned by South African investors, of which 5% is retail. Of the remaining 45% institutional holdings, we include the Gordon family interest (13.3% pre Trafford Centre transaction) held by founder Donald Gordon (Life President) and three grown-up children (Richard Gordon on the board of CSC as non-executive director).
But they might block the Trafford deal and preserve the status quo at CSC so neither Whittaker or SPG take control:
Update: 9:25am (BST). CSC responds.
Capital Shopping Centres Group PLC (“CSC” or the “Company”) notes the latest letter to the Board of CSC by Simon Property Group, Inc. (“SPG”) released this morning containing an indicative proposal which CSC notes is subject to SPG Board approval and financing.
The letter also states that SPG “reserve the right to terminate our interest in CSC immediately at any stage and without reason”.
The Board of CSC is meeting today to consider its response to the latest letter and a further announcement will be made following that meeting.Shareholders should be aware that there is no certainty that an offer will be made nor as to the terms upon which any such offer may be made.
And here is some analyst comment.
Michael Burt of Execution Noble:
There are undoubtedly two clearing prices for an acceptable offer for CSC; one that is satisfactory for a UK shareholder base and one that is satisfactory to the South African shareholder base and the Gordon family. From the perspective of UK shareholders, we consider that an offer for CSC at 425p, which is a material premium to triple net asset value, represents a rare opportunuity to realise a share price that in the absence of a bid spec could take two years to materialise on the back of NAV growth. We would also highlight the fact that CSC’s NAV is based off rental values (ERVs), which are set 7% higher than Q3 letting evidence for long-term leases. For South African investors there is a higher opportunity cost to selling out of their holdings in CSC as they would not be able to recycle their holdings into other UK property vehicles which do not possess South African listings. This perspective necessitates a longer time horizon in investor’s minds and as a result 425p is unlikely to represent a knock-out offer. UK investors also face an opportunity cost from potentially seeing one of only four FTSE 100 REITs taken off the market. These assets would be highly unlikely to return to the UK listed sector in the next decade and this significantly narrows investors’ ability to participate in a liquid, pure-play on UK retail property.
The bid level strikes us as an opening gambit that is unlikely to secure a recommendation from the CSC board. 435p+ feels a more likely level in order for Simon to win the support of the CSC Board, the Gordon family and the South African shareholder contingent. CSC’s shares closed at 337p on the day that the Trafford Centre deal was originally announced by the company and in our view this is the clean price on which the deal should be appraised. The 425p offer represents a 26% premium to that base price for a company which was a consensus Sell ahead of the offer period. Having been unconvinced over the economics of the Trafford Centre deal and with the register set to become only more congested were Peel to gain a 25% holding, we would be tempted to strongly consider a rare liquidity event.
JPMorgan:
Another rabbit is likely to be pulled out of the hat. What is next? In our view, the following steps will happen over the coming days: (1). CSC opens its books, (2) Simon is testing the market with its indicative offer and we think will gather feedback from CSC and Simon Property shareholders. We think Simon will, however, find out that CSC shareholders are not likely to accept the offer at the current level, while its own shareholders are keen not to pay too much, (3) Simon realizes that it has to improve its offer and is in our view likely to pull another rabbit out of the hat. But it has to be a big one.
Indeed.
Liberum Capital:
- We await CSCG’s considered response – but at this stage of the morning we think the chance of the EGM/acquisitions still being passed (over 50% majority required) represents enough risk for most investors to lock-in profit and sell the shares. Simon is a special purchaser and we think the probability of the tree having been shaken producing additional bidders very low. We think on balance the EGM will be successful given CSCG’s obligation to follow the legal process in relation to its binding contract with Peel and due to the fact that the Gordon family (13.3% holding) and the large South African shareholding (c. 25%) would have to replace the income from their investment in CSCG.
- If CSCG’s board engage with Simon, we guesstimate 450p is the next stop, and dependent on the precise wording of the response we may alter our recommendation to ‘hold’ if we perceive sufficient visibility of both boards working together to a recommended bid. The key point is whether CSCG will postpone the EGM.
- Investors should pay close attention to trade in CSCG’ shares today for signals as to whether Simon is buying in the market – increasing the probability that the EGM would be postponed/fail. At that point ‘arb’ activity would also move us closer to a ‘hold’ recommendation.
Related links:
Simon says… how about this for a screeching U-turn? - FT Alphaville
Simon says… the game is up – FT Alphaville
Simon Property Group goes shopping – FT Alphaville