A Report In The Sunday Times That Intu May Be Subject To A Bid
Orion Capital Managers, run by Aref Lahham, is understood to be in the early stages of seeking partners for a buyout of Intu Properties
Intu The Property Company Has A Problem
Just to remind, this is about CCRGF:US, or INTU:LON, not the American software company.
I've pointed out the basic problem in the British commercial property market a number of times here. The irruption of the internet means that retail property is significantly overbuilt in the country:
The point being that we've significant change happening in the underlying market here. Actually, rough statistics say that some 18% or so of UK retail spend is online now and some 16 or 17% of retail floorspace is empty. There's a connection between those two numbers, obviously enough.
We would therefore expect to see a certain decline in the value of commercial retail property and also in the companies that own much of it.
We are indeed seeing that decline:
We've also something more specific than just the decline in property prices. These companies are geared:
Leave aside the sector-wide point for a moment, this company specifically has a large amount of debt secured against those properties. So do all of the other such companies like Hammerson (OTCPK:HMSNF) (LSE:OTCPK:HMSO) and Land Securities (OTCPK:LSGOF) (OTCPK:LDSCY) (LSE:LAND). As rental income declines the cover for that interest bill declines. And as the capital value of the properties declines, so does the security for the loans. Given the general assumption that rents will never be negotiated or reviewed downwards, these companies tend to be well geared. Falling cover and security can mean either dumping properties into a falling market or having to go back to shareholders for more equity capital.
That last item is Intu has announced they're thinking about.
That is, we would expect the equity to be worth nothing long before the properties themselves are worth nothing. Because there are outstanding loans against the value of those properties. Gearing does work both ways, raising returns on capital on the upside and destroying capital on the downside.
Intu's Real Problem Then
As we are told in the Sunday Times the falling property valuations are leading to a capital crunch. There not really being any useful internal solution to this:
Analysts at the broker Stifel warned last week that Intu was at risk of breaching covenants on about £1.1bn of debt in the near future as the value of its assets continued to tumble, putting it at the mercy of lenders.
Stifel said in a separate note last month that a rights issue to cure the debt problem would require “such an enormous contribution from shareholders, we think it unlikely to succeed”.
I've seen this happen at another property company - sadly a friend worked for it. Falling valuations meant breaches of loan covenants, thus forced sales. Such then depressed the remaining capital in the company meaning more covenants were broken leading to more sales. In the end the company ate itself trying to stay ahead of the bankers.
So, What's The Way Out?
If shareholders won't provide the necessary capital, if there's, as there is, that significant debt repayment to come, some other solution is necessary. At which point, why not a private equity takeover? Adding capital, refinancing the debt, would allow a working out of the problem at much better prices than a forced sale. Thus this report in the Sunday Times:
A private equity tycoon is exploring a deal to take the struggling owner of the Trafford Centre and other retail properties private as it faces a £1bn debt crunch.
Orion Capital Managers, run by Aref Lahham, is understood to be in the early stages of seeking partners for a buyout of Intu Properties, which has been battered by a string of insolvencies from retailers such as Debenhams and Sir Philip Green’s Arcadia Group. Intu’s rental income fell by almost 18% in the six months to June and the value of its portfolio, which also includes Lakeside in Essex, was slashed by 9.6%.
Economic things which make sense tend to happen. Those that don't don't. I find it difficult to see a way out for Intu other than a takeover. No other financing operation seems to solve the basic problem. Given the following there's an obvious group to do that takeover:
A source close to the situation said a takeover bid was likely to avert the debt crunch. Orion, which holds 9.2%, would need to work with John Whittaker’s Peel Holdings, which has 27.3%; Saudi Arabia’s Olayan Group, which has a stake in Peel; and at least one other party.
I think we can take the idea as being serious at least.
The Investor View
Any such takeover would have to take out the smaller shareholders at a premium to current valuations. There's thus an opportunity for a speculation that it will happen and soon. For those feeling brave this could be an interesting flutter or bet.
This is definitely not a long term trade nor one for widows and orphans.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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