A merger between West End REITs Capital & Counties and Shaftesbury could be on the horizon after Capco’s opportunistic purchase of Samuel Tak Lee’s 26.3% stake in its neighbour for £436m.
“The strategic rationale is compelling; it is savvy corporate manoeuvring and may pave the way for an all-share merger,” said Rob Virdee, analyst at Green Street Advisors.
“The economics look neutral for Capco shareholders,” he added. “The discounted price they paid was key – managing to buy the stake at a similar gross asset value discount that they are trading at.”
Capco is flush with cash after last year’s £425m sale of its scheme in Earls Court to APG and Delancey. The company also has a £705m revolving credit facility, sealed last year, and with a low LTV of 16% has been looking for opportunities to invest.
This particular investment will push its LTV to 30% and leave it with £525m of cash and undrawn committed facilities, with a further £120m from the sale of Earls Court to come. Virdee believes Capco’s LTV “still ends up OK relative to the rest of the sector”.
Capco is a rare example of a property player to remain lowly leveraged through the cycle, he said, and in “avoiding financial distress themselves [they] have now managed to take advantage of distress in others”.
Unique opportunity
Announcing the investment, Capco chief executive Ian Hawksworth said: “The investment in Shaftesbury represents a unique opportunity to deploy our capital in an exceptional portfolio at an attractive entry price, which we believe will generate long-term value for Capco shareholders.”
Capco’s shareholders include Norges Bank, which holds a circa 13% stake in the business. Norges also owns just over 25% of Shaftesbury.
UBS analyst Osmaan Malik has called Capco’s stake purchase an “interesting” move, coming instead of the company pursuing its share buyback. Capco had planned a £100m share buyback programme, which it paused in March having returned £12m to its shareholders and has now dropped completely.
Capco’s opportunity to buy into Shaftesbury arose after major Shaftesbury shareholder Tak Lee decided to auction off his stake for more than £5 per share last week. Capco topped the bidding at 540p per share. This was still a 13.9% discount to Shaftesbury’s closing share price on 29 May.
The company expects to have completed the acquisition of 64.4m shares by 3 June for £348m in cash, representing 20.9% of the holding. The purchase of the remainder of Tak Lee’s holding, consisting of 16.3m shares, is subject to Capco shareholder agreement.
Impact of coronavirus
Both REITs’ portfolios comprise large amounts of retail and F&B. Capco’s Covent Garden consists of several luxury retailers, while Shaftesbury’s are more mid-market, niche and boutique types occupying the 15.2-acre estate’s 608 restaurants, cafés, pubs and shops.
These West End retail and leisure tenants, reliant on workers in the capital and tourism, have been particularly hurt by the outbreak of Covid-19 in the UK. Most have had to shut down during the UK’s lockdown.
Hawksworth said: “While we can expect continued market uncertainty in the near term, we are confident about the long-term fundamentals and prospects for the West End and prime central London.”
To help its tenants, Shaftesbury’s executive directors have already agreed to cut their base salaries and pension contributions by 20% for three months to fund a community fund for its partners.
Capco has also admitted that its Covent Garden holdings had been significantly impacted by the outbreak of Covid-19 but has not yet reported any measures taken to aide its occupiers.
“You can’t get away from the fact that in the near term retail and F&B in the West End is in a tough spot, it’s been decimated by the pandemic, and both Capco and Shaftesbury have around 60% of their tenants in that space. Green Street estimates both companies to generate single-digit five-year unlevered IRRs,” Virdee said.
“However, this is one of those rare M&A instances when bigger is better – [general and administrative] cost savings, C-suite savings and control over a large swathe of central London with associated asset management opportunities could all be notable.”
Green Street Advisors has estimated that £180m could be saved by cutting 60% of Shaftesbury’s G&A cost.
The price paid, Green Street Advisors added, indicated a 20% decline over a year in the value of Shaftesbury’s assets, while UBS’s Malik said that Shaftesbury and Capco’s portfolio values have declined roughly 37% this year.
Malik added that Capco stands at a 46% discount to its full year results NAV of 293p, while Shaftesbury stands at a 38% discount to its full year NAV of 982p.
To send feedback, e-mail louise.dransfield@egi.co.uk or tweet @DransfieldL or @estatesgazette
