The late oil billionaire J Paul Getty once remarked during one of those familiar shakeouts in his industry: “It’s cheaper to drill for oil on Wall Street.” Basically, he was observing that the stock market was substantially undervaluing oil company assets. It therefore made more financial sense at those times to acquire oil assets by buying these companies, rather than exploring for new oil or buying oil properties.
Meanwhile, back in the present day,
Getting involved in stock market listed companies just isn’t Whittaker’s style but the fact that he’s doing so suggests that the listed sector may contain some value. Whittaker, like Getty in his day, is known for his insight into the workings of the markets in his industry.
Another property developer, Paul Kemsley, who apparently gets spotted regularly on the UK poker circuit, has been eyeing Shaftesbury. This UK real estate investment trust (REIT) is almost entirely composed of a dream portfolio of prime retail outlets concentrated around London’s West End that command huge rents. Rumour has it that Kemsley is preparing a bid for
Meanwhile, UK-listed property group
The interest is not that surprising. Many property counters have fallen by more than 35% in the last 12 months and trade at discounts to NAV of over 25%, while bricks and mortar values have dropped by just 15%–20%. There’s no doubt an arbitrage opportunity, if only it can be realised.
Over the last several weeks, IFR Buyouts has had conversations with numerous private equity groups and advisers. The message coming through is that the listed UK property sector contains some very interesting takeover prospects and that private equity groups are actively studying the public market.
The fact that UK property shares offer great value might be wonderful news for investors and even property tycoons with a few quid to spare. After all, many will no doubt just hold the shares and then sell them when the market eventually rises sufficiently to reflect their view of fair value.
This may well be Whittaker’s and even Kemsley’s game plan as they leave others to speculate about their real intentions. After all, they’re under no obligation to make a bid for these groups or to try and gain control of them.
Public to private challenge
For private equity, the object is normally to take a company private, ie, buy it out and leverage it up to enhance returns. But taking over listed property companies poses a particular challenge.
If management is opposed to the idea, but the bidder still wants to go ahead, the offer becomes hostile. At that point the shares soar and possibly end up priced just under or beyond NAV, thereby rendering the logic of the bid null and void
Their only real chance of gaining control of a listed property company at a “reasonable price” is if institutional shareholders are the predominant owners and just want out, but can’t flog their shares on the open market because it would depress prices further. If management has a big stake in the company, they’ll probably take the same view as private equity and will be prepared to hold out for better times.
Another approach is to convince management to keep their shares and partner with private equity in taking their companies private. Deals of this type may well emerge if the real estate sector remains depressed.
However, a more logical move, from an institutional investor’s point of view, is if the property company in question simply sells its assets and returns the cash to shareholders.
Nevertheless, making a move now on listed property companies will certainly take guts, as shares are once again sliding downwards and who knows at what level they’ll eventually bottom out.
But then again, quoting Getty: “The meek may inherit the earth, but they won’t inherit its natural resources.” More than likely, they won’t inherit its real estate either unless they come from very wealthy landed families.