In May, Marco Tronchetti Provera, chairman of Italian tyre manufacturer Pirelli & C, officially confirmed press rumours of a spin-off of Pirelli RE, the group’s real estate arm. To carry out the demerger, expected to be completed by the end of 2010, Pirelli will distribute nearly all its 58% stake in Pirelli RE among its shareholders.
The operation will result in a voluntary reduction of the corporate capital of Pirelli & C for an amount equal to the value of the Pirelli RE shares being assigned. Among Pirelli & C’s shareholders, energy and investment group Camfin will hold close to a 15% majority stake in the new venture. Generali, Mediobanca and Unicredito also expressed interest in entering the syndicate, which would jointly hold less than 30% of Pirelli RE’s capital.
However, Allianz, Premafin and Lucchini, which hold stakes in the parent company, will not take any shares in the new company, which will be called Prelios.
Pirelli RE chief executive Giulio Malfatto says that following the demerger, Pirelli RE’s free float would increase from 42% to nearly 70%, “transforming Pirelli into a public company and guaranteeing greater strategic flexibility”. Pirelli RE’s lenders unanimously approved the demerger.
Simonetta Chiriotti, equity analyst at Mediobanca Securities, says: “The agreement is a strong sign that the group’s lending banks are now confident that Pirelli RE will not have problems operating on a stand-alone basis,” And she adds that the new shareholding structure after the spin-off makes Pirelli RE more appealing to possible takeover bidders or to potential industrial partners.
However, a number of commentators expressed concerns. Alberto Villa, analyst at Intermonte Bank, welcomes the increased visibility of the timing of the spin-off, the entrance of new financial shareholders with the option of more new shareholders joining, and the green light given to the spin-off by almost all the group’s banking creditors. But he points out that after the demerger, the shareholder base will drastically change, increasing the risk of flowback.
But Malfatto doesn’t seem to share the market’s concerns about Pirelli RE’s change of name and shareholding structure. “At an organisational level, nothing will change,” he says. “Since last year we have refocused on Italy, Germany and Poland, while continuing to specialise across various market segments.”
However, according to Italian press reports, local estate agents, partners of the Pirelli RE Agency division, complained about the change of name and threatened the company with compensation claims or with an exodus to the competition should they not receive enough reassurances on the rebranding.
“We don’t expect any negative impact following the separation [from Pirelli & C] and we have already set up a programme to guarantee a smooth re-branding process,” Malfatto explains. The fund manager will be allowed to use Pirelli RE’s name until December 2012. After that, the Prelios branding will take over. This, in addition to implementing a comprehensive marketing strategy, should be enough to reassure partners and investors, a source said.
The company intends to further consolidate its position in the fund and asset management sector. It has recently obtained a mandate to manage a €600m primarily commercial portfolio in Italy, aimed at the creation of a new fund. Pirelli RE has also won the bid launched by Enasarco, the Italian pension fund for sales agents and representatives, for the creation of a residential property fund reserved for selected investors.
In Italy, Pirelli is also bidding for the sales mandate of Bank of Italy’s €330m real estate portfolio, which includes the Salone Margherita theatre, among other assets. The other bidders include Mediobanca, Intesa Sanpaolo and Ernst & Young. The outcome of the tender process, which closed on 22 June, is yet unknown.
The company also aims to overhaul its Italian business through the optimisation of its asset portfolio and the divestment of its non-core assets. “Our 2010 sales target ranges between €1.3bn and €1.5bn. Out of this amount, non-core asset sales would account for €200m,” Malfatto says. The fund manager is also targeting international investors looking at the Italian real estate market.
Pirelli’s RE’s German investments represent a big headache for the company. “Germany remains the most troubled area,” says Mediobanca Securities’ Chiriotti. In March 2008, Pirelli RE, in partnership with the Borletti Group, Generali and RREEF, acquired a 49% stake in the Highstreet portfolio, consisting of German department store premises operated by KarstadtQuelle, for around €800m. The Highstreet portfolio includes 164 assets in Germany, including 81 department stores, nine sporting goods stores, 28 parking lots, and 14 office buildings. Pirelli has been acting as joint asset manager of the portfolio, along with Whitehall, a Goldman Sachs property fund, which holds a 51% stake in Highstreet.
However, Karstadt’s parent Arcandor, the operator of the department stores, filed for insolvency in June 2009, placing the rental income from the stores in jeopardy. In May, Chiriotti wrote in a note: “The turning point would be the sale and restructuring of the retail group Karstadt, the Highstreet tenant, but no buyer has materialised so far.”
In June, Berggruen Holdings won the bid to acquire the insolvent retailer, after Karstadt administrators reviewed a number of offers, including one from the Highstreet shareholders. The bid is subject to agreements over rents with the Highstreet consortium, which too had submitted a last-minute bid at the end of May. But its offer fell through. According to market rumours, Berggruen has offered the Highstreet consortium 10% of Karstadt returns in exchange for a decrease in rents.
Malfatto refuses to comment on the speculation. “What we can say is that we are satisfied with the interest shown by a qualified and well-known individual in the German financial community to acquire and relaunch an important international retail player [Karstadt],” he says.
Analysts are sceptical
Analysts had expressed some scepticism regarding Pirelli’s potential involvement in the Berggruen deal. “We would regard negatively an involvement of Pirelli RE in this kind of deal considering that it would be an acquisition completely outside Pirelli RE’s core business,” Chiriotti says.
The Highstreet portfolio, however, is not the only controversial investment that Pirelli RE has made in Germany. In 2007, Pirelli teamed up with RREEF to acquire German residential property specialist BauBeCon from US private equity fund Cerberus for €350m, with RREEF taking a 60% stake in BauBeCon’s €1.6bn portfolio.
The deal followed RREEF and Pirelli RE’s 2006 acquisition of German property company Deutsche Grundvermögen (DGAG) for €440m.
As of October 2009, the BauBeCon loan, secured against 26,000 residential units in north-east Germany, was worth €1.2bn, reflecting a loan-to-value ratio of 87.5%. Pirelli RE holds a 40% stake in the loan, which is due to mature in August 2013. While the vacancy rate of the DGAG portfolio is 2.55%, the BauBeCon portfolio’s vacancy rate is 4.9%, down from 6.5%.
In 2009 Pirelli RE has disposed of 2,000 residential units worth €105m. “We hope to continue in this direction during the second half of 2010,” says Malfatto.
Last year in the retail sector, Pirelli RE sold €300m of German assets, which it continues to manage. “During 2010, we hope to increase our German asset management revenues to more than 40% [of our German business],” Malfatto says.
