In a few days, the UK property sector will see how supportive the market is of the demerger of one of its biggest beasts, Liberty International.
The process has been remarkably smooth for such a complicated transaction, helped by the clear demarcation of Capital & Counties (CapCo) and Capital Shopping Centres (CSC), and the fact that the split makes sense in offering investors a choice between the two.
Whether life remains as untroubled after the demerger is open to question, however, given potential short-term buffeting from shareholders looking to buy in and out of each on preferences over the London schemes of CapCo or the shopping centres of CSC.
The longer-term picture could be just as interesting. There is an argument that neither will be trading in the same shape in a year’s time given their attractions to consolidators in the UK market and predators from overseas. Ultimately, both companies have made themselves more vulnerable in being smaller vehicles holding purer sectoral assets.
All eyes will first be on initial trading, in particular CapCo, which could suddenly be without support from investors from South Africa, where it will no longer be listed and so will fall under foreign investment allowances.
This group mainly voted against the demerger at the EGM and could be the source of an overhang of stock. There are also the uncertain intentions of Westfield and Simon Property, the rival international shopping centre owners, which own close to 3 per cent and 6 per cent respectively.
Morgan Stanley estimates that there could be as much as a 40 per cent share overhang from the combined South African investors, and from Westfield and Simon, if they decide to sell.
In addition, some existing institutional investors will not be able to invest in CapCo after it loses its Reit status and drops out of the FTSE 100 and MSCI Standard indices. Investment company Exane calculates potential selling pressure of almost 30m shares, or about £39m of stock, should all funds sell immediately.
However, it is likely that fears of a large overhang have been overcooked, even if a few days of volatility can be anticipated. There is no talk in the market of any large placements of shares ahead of trading, which could suggest that the South Africans may hang on for the time being. They have up to two years before they need to sell and, if any of them do, that is a door closed, given an inability to buy those shares back.
More crucially, there has been a swing in sentiment towards central London development, which means that CapCo has picked a voguish time to list. CapCo has attractions in its London joint venture and ownership of Covent Garden, but the key will be the 23-acre Earls Court site, which could offer significant development profits over the long term. It is valued at £5.9m an acre, but analysts estimate that the site could increase to £15m-£25m an acre by the end of 2012 following residential planning permission. Morgan Stanley’s bull case is of £40m an acre, an 85 per cent growth in net asset value.
Planning gains should appear towards the end of the two years that the South Africans can hold for – and some will no doubt do just that. CapCo will also have a new management team led by Ian Hawksworth that is eager to prove its credentials.
Earls Court could also prove to be the honey for a potential takeover – particularly as the capital-intensive site needs new equity. The obvious buyer would be a sovereign state fund, given the longer-term returns, although overseas property companies, particularly from North America, could be interested. Unibail-Rodamco has been linked with a bid to bolster its own large conferences business, for example, and a continental buyer would benefit from sterling’s weakness.
One rival chief executive laughed last week that CapCo was likely to start trading at a premium given the amount of takeover talk. He had been asked three times that morning if he was interested. His reply? “Maybe”.
CSC, the owner of Liberty’s prime UK malls, will remain in all indices, meaning there will be little technical pressure on trading. It has its own attractions in becoming more of a cash cow for investors with a better earnings yield as a result of the demerger.
Again, the company may have suitors. Westfield and Simon can be assumed to be interested in the malls from when they began buying stock in Liberty. It becomes manageable also for the likes of Land Securities or British Land, looking to make a mark on the recovery cycle. Gossip linked London & Stamford with a reverse takeover only a few months ago.
The last big European real estate demerger was of Rodamco, which split four ways. All ended with new ownerships, albeit it took eight years before the European business was eventually merged with Unibail. There are similarities between the European business of Rodamco and CSC, given their prime retail portfolios that would be very difficult to replicate given planning restrictions.
There would have to be a big premium to NAV, of course, and that is rare in the property sector. But some could feel that it is better to move soon than miss out in a few years’ time should values continue to recover.
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