During this year, we are likely to see braces of property companies tripping happily down the aisle together — or, alternatively, some may be forced into the embraces of wealthier partners.
This is the conventional wisdom among analysts and bankers, who see a sector which has swollen to over 120 quoted companies, and a cooling market. Indeed some are actively arranging these marriages.
Bankers Trust, which has an active property lending department, is one bank which identified mergers and acquisitions as an area into which it wanted to move several years ago. “We know if firms are up for sale,” says Philip Middleton, a vice-president in the property division. “We started to discuss possible deals with clients.”
On one side, there are the cash-rich companies — or those with generous bankers — who are still keen to expand.
On the other side of the fence, smaller players with shallow pockets are beginning to feel a bit nervous.
“I think there are a variety of reasons why people want to talk. Some are not finding it so easy to fund development as before; there’s not the capital back-up. It’s not a good time to go to the market,” says Middleton. “They’re wondering if they might not be better off if they moved into the embrace of someone larger or with a bit more ready cash.”
Then, too, some property people have become disillusioned with the way in which the stock market rates their companies. “They have a high opinion of their abilities and resent the fact that the market is very much undervaluing them,” says Middleton. “An agreed bid is a way of realising the value of their shares.”
His bank has just acted as matchmaker in the biggest agreed offer so far — between Ford Sellar Morris and Brookmount. FSM, run by Irvine Sellar, has expanded rapidly since it came to the USM. Capitalised at £46m, it now has an investment portfolio worth some £103m, and an ambitious development programme.
“Irvine is determined to grow the company. Ideally you’d do it organically, but that’s not easy even in the best of times. And these are not the best of times,” comments Middleton.
Sellar, a former Carnaby Street trader, and the American bank — whose style tends towards the pukka Brooks Brothers — are odd stablemates. But the two found they could do business together last year, when Bankers Trust funded FSM’s £44.6m purchase of Centrovincial Estates. The latter was then owned by merchant bank Singer & Friedlander, who gave Sellar an option on the whole portfolio provided he could do the deal in seven days. “He came to us after three days,” says Philip Middleton.
Bankers Trust loaned FSM £32.6m, bringing in a group of other banks. “The syndicate had to take a certain amount of faith,” notes Middleton. In particular, they had to trust in Sellar’s ability to reduce the 250% gearing (secured on assets of £16.8m) by selling off properties. The bank stipulated a two-year phased payout — “a pretty stiff programme”. Sellar bettered it, and after only one year Bankers Trust re-financed the rump of the loan.
This time around, Bankers Trust is risking £111m. “It’s a very large amount — the largest loan we’ve ever underwritten ourselves,” says Middleton.
“We see it coming down quickly, though we haven’t put FSM under any great pressure — Irvine proved what he can do with Centrovincial.” But with his gearing back up to 200%, Sellar is already planning disposals which will reduce it to 80%.
He started looking at potential acquisitions last autumn and talked to at least half a dozen candidates. “I think in this climate there’s a little bit of nervousness,” says Sellar. “Some operators are looking to get out.”
Brookmount — or rather its founders and principal shareholders — was one of these.
The company had been started by two Northern Irishmen, Harry Sproule and Jack Wilton, and they still controlled the company via an 18.8% stake. Initially concentrating expansion: it acquired Atholl Land, on the province, they developed a portfolio of retail property, including two shopping centres, in Belfast and Ballymena.
Then in 1984, Sproule and Wilton teamed up with Brian Craig, a surveyor who had worked with Shell and ran the development arm of Midlands contractor WA Blackburn. Craig brought mainland contacts and a portfolio of British projects. The company expanded, teaming up with Trafalgar House to form an 80 -20 joint venture, Trafalgar Brookmount, which bought 260 acres of the Brooklands site in Weybridge to develop.
By 1986, Brookmount was ready to go public. That January it joined the USM, capitalised at £7.6m. The next 18 months were ones of heady from British & Commonwealth, for £7.7m and planned large schemes in Sundon Springs, Cleethorpes and Newcastle.
By June 1987, stock market euphoria had taken its share price from 160p at flotation to a dizzy 795p — a historic price-earnings ratio of 34 and two-and-a-half times Brookmount’s net asset value per share. “Not a stock for the faint-hearted,” commented the Financial Times.
This bull run culminated in September 1987 with the purchase of a £60m portfolio from Trafalgar House, and — more surprisingly — the purchase of a small City-based firm of agents, Wright Oliphant. These acquisitions were partly funded with shares and cash, raised via a £17.9m rights issue at 650p a share.
The portfolio deal trebled Brookmount’s investment holdings at a stroke, and increased Trafalgar’s stake in the company to 22%. The logic of taking on Wright Oliphant was less obvious.
Six weeks later, the stock market crash took Brookmount’s share price to 355p. By early 1988 Messrs Sproule and Wilton were unhappy men.
Bankers Trust knew that Sproule and Wilton wanted to get out. “They were disenchanted by the fact that they had done an immense amount to build up the business, taken it public, participated fully in the rights issue, and one-and-a-half-months later it was worth less than half,” says Middleton.
Then, too, there were splits between the British management and the Northern Irishmen, who had stayed on their side of the water. “Unless they came over, Brookmount would go in a different direction.
“The Irish shares were available; we knew that others had looked at them. But the disadvantage was that you were paying a substantial chunk for the company, but had no control,” says Middleton. “The key to the deal was Trafalgar House.”
So Bankers Trust approached Trafalgar House. Having established that there was, indeed, a price at which TH were prepared to sell, it turned to FSM. “Brookmount was a good match geographically — most of their portfolio is outside London and the South East, and it brings a development programme.”
Then came the approach to Brookmount: “In the beginning it was extremely difficult to get them to talk seriously. I think they hoped we would go away, because although the main shareholders were prepared to sell, the management was not.”
Eventually, the Brookmount management did start to talk — “I think it was persistence in the end,” says Middleton.
The discussions took some time. “The companies had to see if they liked one another since it was important that a substantial part of management should come to FSM,” notes Middleton. “Smaller or medium-sized property companies that are well run don’t have any management fat, so they need new management to come with them; they can’t afford too hostile a bid.”
In the end, Bankers Trust and FSM tied in 61% of Brookmount’s equity — 20.8% from Messrs Sproule and Wilton, Brookmount’s management, Trafalgar House’s 22%, and British & Commonwealth, who have a 7.5% stake. Wright Oliphant’s directors also pitched in their 6.5% holding and convertible shares.
At 600p a share, the deal values Brookmount at £84m — a premium of 12% over the market price. Trafalgar House is buying Brookmount out of its joint venture for £4.15m — a price that some observers think is too low, considering that it gives TH the Brooklands project. Some Northern Irish developments and other properties will be hived off into a joint venture between FSM and Messrs Sproule and Wilton; Wright Oliphant’s eventual destiny is yet to be decided.
