At Shaftesbury’s annual general meeting last week, its largest shareholder, Sammy Tak Lee, disrupted the company’s ability to issue new equity freely.
On the surface, the London-based Hong Kong billionaire’s vote against the resolutions appeared to be a protest against the marginalisation of private shareholders in order to access new issuances and water down their stakes. But given the scale of his holding, at just over 25%, what else could be at play?
This week, Jefferies analyst Mike Prew suggested that Lee was trying to engineer a position whereby he became enough of a thorn in the side that management would agree a deal to swap its Chinatown estate for his stake.
“We suspect the game plan is to leverage Shaftesbury into buying his 25% stake with a value of £727m in exchange for Chinatown (gross asset value £792m, net asset value £502m). Otherwise, we don’t know how much firepower Lee has.
“Shaftesbury’s portfolio of a large number of small lot-sized assets results in an asset valuation at a discount to the sum of the parts (10%?), and then applying a portfolio premium (10%?) and then a 20% (say) premium for control, then a cash bid needs to be pitched at more than £14 [per share] or £4.3bn,” he wrote.
Swollen coffers
Jefferies also pointed out that Lee has swollen his coffers by selling an £863m Japanese portfolio to Norges Bank Investment Management and Tokyo Land.
The Chinatown theory is driven by its proximity to Lee’s 1.3m sq ft neighbouring Langham Estate, which covers 13.8 acres between Oxford Street, W1, and Euston Road, N1, and that the two would fit neatly together.
However, the attractions of such a deal for Shaftesbury shareholders and management in exchange for Lee’s disappearance seem limited given the Chinatown estate is one of its five “villages” with the most potential for growth (see box) .
In making the company’s portfolio smaller it becomes necessarily less diversified and prospectively less resilient to changes in tenant trends and failures. For other Shaftesbury shareholders, simply giving in to Lee and them ending up with exposure to a more concentrated portfolio is unlikely to make them enamoured with management.
Lee did not manage to garner huge support from the rest of the shareholder base: the three resolutions he voted against using his 25% stake received no votes of between 27.5% and 29.8%.
But that is not to say that a mere reluctance to do such a deal means Lee is not causing management a headache, by restricting its equity issuance (see box) and by insisting to have a major say in the future of the company.
Before 2016 Lee had often “played the share price”, flicking the size of his stake up and down and taking advantage of market movements. But since then the size of his holdings have moved only one way – up.
He is playing his cards close to his chest. Shaftesbury management has continually tried to engage with Lee and establish an open dialogue but there has been no reciprocation. This was played out at the AGM itself, at which Shaftesbury directors attempted to take the opportunity to hold an impromptu discussion with a senior Langham director and its lawyers from Stephenson Harwood.
Consent needed
If a suitor were to look at bidding for Shaftesbury, it would be impossible to undertake a successful takeover without Lee’s consent. In order to progress a takeover in the most straightforward manner, it is necessary to gain 90% support although it can also be achieved with 75% using a High Court scheme of arrangement. But with Lee’s current stake, both are out of reach.
It would be possible to take part control of Shaftesbury by buying a stake of more than 50% but it would need to remain listed and with a prospectively disruptive shareholder it would be unwieldy to run at best.
Given this, any prospective bidder for Shaftesbury would have to either offer Lee a handsome premium for his stake or partner up for a takeover and split afterwards, with Lee walking off with Chinatown.
Langham and Lee have some in-house expertise if such a deal was pursued. The company is headed by chief executive Ahsan Ellahi, the former head of structured finance at Eurohypo (now part of Wells Fargo) and head of real estate corporate banking at HSBC.
In 2015, when Lee owned just 3.9%, he made a lowball 888p offer for a 9.3% share at a mere 2.1% premium to the share price that was dismissed out of hand.
The famous “lucky number bid” was always set to be rejected but it, like the votes at the AGM, has created increased furore around Shaftesbury and attention on Lee. It is such an attitude that has prompted some market experts to suggest that his tactics are a way of drawing in a potential partner to help him, on one hand demonstrating his influence but on the other highlighting his limitations and need to team up.
Lee is understood to have engaged with several parties over partnering since 2015 but sources that were involved in discussions cited caution from investors over allying with a low-key but “unpredictable” billionaire.
Holding such a large position also has inherent risks. It would be impossible for Lee to sell his shares at the current price, because if he decided to exit all of a sudden the share price would tank.
If for any reason there was a dramatic slide in the company’s share price, which is unlikely but not impossible in the face of a poorer-than-anticipated Brexit deal or even worse a terrorist attack affecting London tourism, he would see a dent to his relatively concentrated wealth.
The HSBC factor
Lee is understood to be a major customer of HSBC and his stake has historically been acquired in part using its finance and advice. If a dramatic slide in Shaftesbury’s share price did occur, under traditional lending structures it would be necessary to pump in equity to maintain the loan-to-value level of the agreement and in extreme circumstances a lender can exert the option to force a sale of shares and recover any losses from the borrower.
No one party holds all of the cards over the future of Shaftesbury. But one adviser observed: “I would be amazed if there was no movement in the next couple of years with either a bid from Lee or a sale of his stake – something’s got to give.”
Lee’s impact on Shaftesbury
As a result of Sammy Lee voting against resolutions at the company’s AGM, management can no longer raise funds in a cash box. Previously, once a year, for up to 10% of its market cap, it could offer shares exclusively to a small number of large institutional investors rather than the whole shareholder base. In such issuances the holdings of private shareholders such as Lee are watered down.
Instead it now has to raise funds through a full rights issue, which has many practical disadvantages. It is a far more costly process and as a result companies tend to undertake larger issuances in order justify the expense. It can also take much longer, meaning that the process is more open to market fluctuations.
A full rights issue also affects how quickly the company can deploy capital into an opportunity, and can force the company to provide information to the market on opportunities it is sizing up that it would rather keep under wraps, given heightened levels of disclosure for retail investors.
Company chairman Jonathan Nicholls shrugged off the result of the vote. He said: “The board does not anticipate the need to raise further equity for some time. Continuing investment in our portfolio will be funded using the remaining proceeds of the recent placing, existing, committed debt facilities and any new facilities which may be arranged in the future.”
Shaftesbury may have access to untapped debt facilities and low gearing of 21.5% but that is not to say that it can continually ramp up its leverage.
Nicholls added: “The need to maintain a prudent balance between debt and equity, appropriate for a UK-listed company, is kept under constant review by the board.”
The restriction has the prospect of being inconvenient, particularly if Lee continues to vote against it in future years.
Why Shaftesbury won’t give up Chinatown
Chinatown may seem like the least illustrious and shiny of Shaftesbury’s “villages” when compared with Carnaby Street,
Covent Garden, Soho and Fitzrovia, but that is not to say that it is any less valued by the company’s management.
In fact, Chinatown has in recent years been a particular area of focus for driving rents and diversifying the tenant mix. While the traditional focus has been on Cantonese food, Shaftesbury has been improving the breadth of the offering with the introduction of Malaysian, Vietnamese, Japanese and Taiwanese offerings as well as cuisine from elsewhere in China.
With a growing number of Chinese tourists visiting the capital and the number of Chinese students studying in the UK set to soar in the coming years, Chinatown is not something that Shaftesbury will give up easily.
