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Collapse of multibillion rand mergers raises questions

Posted On Monday, 08 September 2014 14:15 Published by
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Collapse of yet another proposed multibillion rand merger in the R300bn listed property sector raises renewed questions on whether consolidation is necessarily in shareholders' best interests.

Laurence Rapp

The latest deal to fall apart was Vukile Property Fund's proposed acquisition of Synergy Income Fund. Vukile announced on Thursday that it was abandoning its plans for a full takeover. The two funds have been in talks since December after Vukile acquired a 49% stake in Synergy B linked units. Synergy owns a R2.23bn portfolio of shopping centres, mostly midsized malls in townships and rural areas.

The deal's failure followed the surprise announcement two weeks ago that sector heavyweight Redefine Properties' attempts to gain 100% ownership of Fountainhead Property Trust had also failed after Redefine's offer fell short of the required 75% consent from Fountainhead shareholders. Only 71% backed the deal.

Fountainhead's shopping centres include Centurion Mall and Westgate in Gauteng, and Cape Town's Blue Route Mall. As a result, the long-awaited winding-up and delisting of Fountainhead will not be implemented. Of particular concern for shareholders is that Fountainhead will have to absorb transaction costs of R7.3m. That is in addition to the R12m in advisory costs it incurred last year when Redefine's bid was opposed by a competing offer from Growthpoint Properties.

This was later withdrawn. The anticipated three-way merger between black-managed stocks Rebosis Property Fund, Ascension Properties and Delta Property Fund was also called off earlier this year, with considerable costs. One merger successfully concluded in recent months is that of sister funds Octodec Investments and Premium Properties, which was given the green light by the Competition Tribunal last week after shareholder approval in July.

Analysts blame pricing issues as a key reason for the recent collapse of property deals. The market has generally favoured consolidation until recently because it created larger, more liquid counters. However, fund managers are growing increasingly wary of deals that they believe could ultimately dilute value for shareholders. Keillen Ndlovu, head of listed property funds at Stanlib, said on Friday it had become difficult to make deals work in terms of pricing and structure.

"The easy M&A (merger and acquisition) deals have been done, like the mergers between Redefine and Annuity, and Arrowhead and Vividend," he said. "But it becomes a lot more complicated where counters have split A and B structures and where the requirements of the A and B unitholders are different, as in the case of the proposed Vukile-Synergy deal. "Mr Ndlovu said liquidity also came into play because it was often difficult to ascertain the true market value of smaller funds.

He believed property stocks that still wanted to pursue proposed mergers, such as Rebosis's planned buyout of Ascension and Growthpoint's takeover of sister funds Acucap and Sycom, "will have to do a lot more groundwork before making offers to minority shareholders as the market is becoming more sensitive on pricing". Old Mutual Investment Group's Evan Robins agreed that the price offered in some of the recent share-swap deals was not attractive. That was particularly true for Redefine's offer to Fountainhead shareholders.

"A deal made sense for Redefine but they should have taken a more market-related view on pricing," he said. "Had they offered a better deal for Fountainhead unitholders months ago, the takeover would probably have gone ahead." Catalyst Fund Managers investment manager Paul Duncan said that the recent failure of merger and acquisition deals was not necessarily all bad for the listed property sector. "We prefer specialised funds, so we do not always want to see them swallowed up by bigger funds for the sake of creating size," he said.

"If the price paid compensated for the embedded value, we would sell." Mr Duncan said size and liquidity were not the only factors to be considered. "Investors are also seeking well-managed funds with good assets. Resilient Property Income Fund, for example, is the highest-rated property stock at the moment but it is not the biggest or even that liquid."

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