Marriott CEO Simon Pearse said yesterday that among other issues the variable debt funding Hyprop would use for the SA Retail acquisition would expose Hyprop unitholders to income risk.
Hyprop is offering R8 in cash for every SA Retail unit, or one Hyprop unit for every 2,7 SA Retail units.
Pearse said Hyprop had assumed a cost of funding of 9%, but this was a variable and not fixed rate and raised the question of the risk to income if interest rates were to rise.
He said market commentators were expecting interest rates to rise over the next two to three years.
Pearse said Hyprop unitholders should also be concerned about the “pricing risk” of the transaction.
He said that from February 1 to May 31, Hyprop’s unit price was up 25%, against a sector average of about 10%, and Hyprop now had the lowest yield of all property funds, at 6,9%.
Pearse said this low yield could be justified in the short term because of Hyprop’s recently reported earnings growth of 16,4%, but such growth was unlikely to continue.
Colin Young, property sector head at Old Mutual Asset Management, said that the group’s official forecast was that there would be a reduction in interest rates of a full percentage point in 2007, barring unforeseen shocks.
He also said that if there was a merger of Hyprop and SA Retail, and the resultant company carried a slightly lower rating than Hyprop did currently, it was unlikely any “derating would be material”.
Hyprop MD Pieter Prinsloo hit back at Marriott, saying it had “no insight” into Hyprop and so was “not competent to express a view” on it. “Their opinions contradict the SA Retail board and their advisers, who have said in the circular that the transaction is fair and reasonable for SA Retail unitholders.”
Prinsloo said most SA Retail unitholders canvassed had indicated they would accept the offer of Hyprop units, and “very little additional debt” would be required for the transaction.