Derwent Valley, the London property company, surprised the City on Tuesday with an agreed £1bn takeover of rival London Merchant Securities to create a new company called Derwent London.
The merger of the two similar-sized groups came as analysts were expecting to be updated on merger talks between LMS and Great Portland Estates, another London property company.
GPE, which on Tuesday announced interim results, said it was no longer considering a deal because it had only interested in a transaction that would have been “value-enhancing” for its shareholders.
The Derwent Valley deal, to be paid in shares, represents a value of 298p a share, a premium of 24 per cent over LMS’s closing price of 240p on September 29. It is at a premium of 5 per cent to the LMS closing price of 283p on Monday night.
Derwent Valley has also offered a cash alternative – up to a maximum of 20 per cent of the offer – of 280p per share.
LMS shares rose 6½p to 289½p in early London trading.
Robert Rayne, chief executive of LMS, will become chairman of Derwent Valley. John Burns, managing director of Derwent, will become chief executive.
LMS has for months been seen as a takeover candidate after it demerged its venture capital arm, Leo Capital, as a separate Aim-listed company.
Derwent Valley and GPE, with similar size and geographic spread, were always seen as the most likely candidates to merge with LMS.
Although another bidder could yet emerge to trump Derwent Valley, potential predators – unless they also pay in shares – are likely to be disadvantaged. That is because Derwent Valley, which is trading at a strong premium to its net asset value, is paying with inflated paper.
In addition, the deal has the backing of the Rayne family, LMS’s controlling shareholders, and LMS directors with 37 per cent of the shares.
Derwent London will have a portfolio worth £2.25bn with 5.6m of space, of which 61 per cent is in London’s West End and 23 per cent in the City borders.
The group would be well positioned to become a Reit (real estate investment trust) next year, it said.
Mike Prew, an analyst at Lehman Brothers, said: “This deal gives the property sector exactly what it needs – a sizeable London office specialist. Investors increasingly want to play specialisation.”
The deal is likely to overshadow a strong set of results from GPE, which exceeded most analysts’ expectations.
Adjusted net assets per share were up 17.4 per cent to 513p for the six months to September 30. That figure was where many analysts expected the company to get to next March, said Mr Prew.