It has been a long time coming. Ever since Capital & Counties took a 25% stake in fellow West End landlord Shaftesbury, market watchers have expected the two FTSE 250 companies to become one.
Now, that looks set to actually happen, after a late night announcement on 7 May confirmed that Capco and Shaftesbury are in formal talks to merge, creating a £3.5bn property portfolio in central London.
Here is everything you need to know about the proposed merger.
What are they proposing?
The proposed deal would be structured as an acquisition of Shaftesbury by Capco. Shareholders of Shaftesbury – excluding the 25.2% stake Capco already holds – would own 53% of the new company. Capco shareholders would own the remainder.
Such a merger has been on the cards since Capco bought out Hong Kong tycoon Samuel Tak Lee‘s strategic stake in Shaftesbury for £436m in mid-2020. However, with the pandemic ravaging West End footfall for both landlords, the process has been at a standstill for nearly two years.
“This is a logical transaction that has been a long time coming,” said Goodbody analyst Colm Lauder. “The merger would create a prime West End retail and leisure portfolio of considerable scale and influence, controlling some of the most significant and highly trafficked retail and leisure pitches in central London.”
Even analysts who once thought a deal was off the table now see how it could work. Stifel’s John Cahill admitted to being taken by surprise by the talks, but pointed to Norwegian sovereign wealth fund Norges as the catalyst for new activity.
“We had previously been of the view that a takeover was unlikely, despite the obvious proximity of the assets on the basis of differing business strategies and portfolio management objectives,” Cahill wrote in a note.
“However, with Norges holding 25% and 15% of Shaftesbury and Capco respectively, and Capco holding 25% of Shaftesbury, the Nordic investment giant was always the potential king-maker.”
What will the newly formed company look like?
ShaftesCo? Capbury? No, we don’t know either; answers on a postcard, please.
What we do know is the make-up of the companies’ portfolios: put them both together and you have 2.9m sq ft of office, residential and retail space which the new company would control, with a portfolio valuation of around £3.5bn.
Let’s break it down:
- Shaftesbury’s West End estate extends to 16 acres and more than 1.9m sq ft of space, comprising more than 600 restaurants, cafés, pubs and shops over 1.1m sq ft, 400,000 sq ft of offices and 630 apartments.
- It also has a 50% interest in the Longmartin joint venture – alongside The Mercers’ Company – which has a long leasehold interest, extending to 1.9 acres, in St Martin’s Courtyard in Covent Garden.
- Capco’s 1.1m sq ft Covent Garden estate is broadly adjacent, and contains 501 units across 70 buildings. The area is home to household name occupiers including Apple, Chanel and Tom Ford, with upcoming openings from Peloton and Reformation.
- In addition, Capco retains an £86m interest in Lille Square, near Earl’s Court, in a (largely completed) 800-unit residential development joint venture with the Kwok family of Hong Kong.
There is even a chance that the new company could eventually join the likes of British Land and Landsec in the FTSE 100.
Stifel estimates a market capitalisation just shy of £3bn for the combined company, based on 3.33 Capco shares for every Shaftesbury share (the firm advised investors to “treat this assumption with caution”).
That might just make it large enough to enter the lower reaches of the FTSE 100 (both Capco and Shaftesbury are currently in the FTSE 250). The portfolio would be valued at about £4.5bn, with the lion’s share split almost equally between retail and hospital and leisure.
But Berenberg analyst Keiran Lee advised caution on the hopes, pointing out that asset values across the West End would need to keep recovering, and the company would need a re-rating to have a shot at the blue chip index. “It’s not a key element of the investment case,” he said.
Who’s in charge?
Shaftesbury’s chairman, Jonathan Nicholls, will take a similar role at the new company, while Capco chief executive Ian Hawsworth will take the CEO post.
Brian Bickell, Shaftesbury’s chief executive of 11 years, has said he will retire on completion of any transaction, while Shaftesbury executive directors Simon Quayle and Tom Welton, who have also been with the company for more than 30 years, will leave the business.
Similarly from Capco, Henry Staunton, chairman, and Jonathan Lane, non-executive director, will retire from the board on completion.
An executive committee containing equal numbers from the existing Shaftesbury and Capco leadership teams will be responsible for the day-to-day management and operation of the combined company.
Capco’s Michelle McGrath will be in charge of the combined Covent Garden portfolio, and Shaftesbury’s Andrew Price will be responsible for the Carnaby, Chinatown and Soho portfolio. Shaftesbury’s Samantha Bain-Mollison will head up group leasing.
So what will change around the West End?
In practice, not that much in the short term. The companies have operated side-by-side for years and know each other’s portfolios very well.
That has been accentuated during the pandemic over the past two years, during which footfall from tourists and shoppers temporarily collapsed, forcing the two to work in tandem even more so than usual.
However, as time goes on, Shaftesbury’s portfolio and tenants are likely to feel more change than their neighbours, according to Berenberg’s Lee.
“[You are] likely to see the Shaftesbury portfolio managed more actively and rents pushed forward more quickly,” he said. This is already a differentiator between how the two companies are run currently.
The pair would also be able to merge their operations teams, meaning they could manage the combined estate more efficiently and for less money. The new landlord would have the “ability to curate complimentary zones of occupiers and activity on a larger scale,” Lee added.
This is already a feature of both estates: Chinatown, the Seven Dials shopping district and Carnaby for Shaftesbury, as well as the East and West Piazzas and Floral Court for Capco.
While it is unclear what new, bigger occupier groupings would emerge, Lee added that it would be “positive for the West End as a whole as it should increase footfall if it is all managed under one roof”.
Is it actually going to happen?
Probably – but there may be obstacles to overcome. The property giants now have until early June to get the deal across the line, under UK competition rules.
Stifel’s Cahill highlighted several factors that may yet scupper the proposals. Those include a possible referral to the competition authorities, the emergence of a cash counter bidder, or a rejection of the deal by shareholders – although Cahill added that the latter would require “a very broad consortium”.
That seems unlikely, then – but not out of the question. While shareholders didn’t rebel en masse today (9 May) there was some disquiet indicated in stock prices, with both companies falling sharply at the open.
Shaftesbury fell 5.7% at the open, before recovering to 2.5% down in the afternoon, valued at 562.5p. Capco, meanwhile, was down 5.9% at the time of writing (3.07pm), valued at 155.7p.
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