French retail specialist Klépierre said on Friday that it is pulling the plug on plans to take over British peer Hammerson after the UK REIT rejected a higher, 635 pence a share offer.
Klépierre, which earlier this week raised its bid by 3%, pointed to the lack of 'any meaningul engagement' on Hammerson's side as the main reason for backing off.
Hammerson has been adamant that the fresh higher takeover bid still 'very significantly' undervalues the company. The 635 pence proposal by Hammerson represented a premium of 45% to Hammerson’s undisturbed share price of 437.10 pence a share on 16 March 2018. It is, however, still 21% below Hammerson's EPRA NAV per share of 776 pence as at 31 December 2017.
Hammerson’s shares dropped by 13% in early trading in response while Klépierre's rose over 4%.
Hammerson revealed in mid-March that it had received and swiftly rejected an approach on a standalone basis (without the Intu portfolio) from French shopping centre owner Klépierre. Under UK takeover rules, Klépierre had until April 16 to table a bid or walk away from Hammerson.
Commenting on the reasons for dismissing the offer, Hammerson's chairman David Tyler said in March that the move was ‘entirely opportunistic in its timing’. 'The proposal is a calculated attempt to exploit the disconnect between our recent share price performance and the inherent value of our unique and irreplaceable portfolio which is delivering record results,' he noted.
Indeed, the Hammerson shares have lost nearly 20% of their value since announcing in early December that it had agreed an all-share takeover of rival Intu to create Britain’s biggest property company.
Presented by management as a winning strategic move, that operation has, however, raised concerns that it would leave Hammerson overexposed to the UK retail market, and that it would dilute the company’s strongly-performing UK portfolio with Intu’s lower-growth properties in the North of England.
‘M&A benefits seldom accrue evenly to both parties; (in this case) Intu is the clear winner,’ Green Street analysts wrote in a report called “Bigger but not prettier” released when the offer was announced in late 2017.
Klépierre's announcement paves the way for Hammerson to complete its £3.4 bn (€3.86 bn) takeover of Intu to create a group with a £21 bn pan-European portfolio. The enlarged group would be led by David Atkins as CEO, and would be called Hammerson.
Hammerson’s shareholders are slated to vote on the Intu merger at the end of April.
Portfolio value
Market experts have pointed out that the main problem in the Klépierre approach was the wide gap between Hammerson’s share price and the value of the company’s portfolio. The first – the basis of Klépierre’s £5 bn valuation - has suffered in the recent past from concerns over the impact of online shopping on brick and mortar shops. The latter – which is what Hammerson would like to be sized up against - is at its historic high, with the company’s net asset value reaching £6.2 bn at year-end 2017.
At 635 pence a share, Klépierre’s approach was rather generous as the share price goes, but was still well below Hammerson’s portfolio valuation, according to Peter Papadakos, an analyst at Green Street Advisors. However, property values are too high, he commented. ‘They do not reflect the direction the market is taking, which is that of a cap rate expansion.’
European shopping centre cap rates are at the end of an era of compression, as indicated by recent financial results of the European REITs, which have reported no yield hardening in their shopping centre portfolios for the last six months of 2017. They are expected to start blowing out some time this year, Papadakos noted. ‘The implied economic cap rate of Klépierre’s approach is estimated to be 4.0% for Hammerson. It sounds generous to pay such a yield when UK retail cap rates are about to expand.’
The collapsed bid could represent a missed opportunity for Hammeson's shareholders, who would have get an immediate 40% premium and prospects for more to come from transferring their equity interest into Klépierre.
Analysts at Green Street Advisors have pointed out in a note that the 40% total return Hammerson has delivered to shareholders over the past six years is about half the level of Klépierre’s. Furthermore, on a look-forward basis, Klépierre’s implied valuation metrics, like-for-like net rental income and earnings projections appear to be at least as good, if not better, than Hammerson and Intu’s.
‘For Hammerson shareholders, the choice between Hammerson the acquirer and Hammerson the
acquired appears to be 1) 40% immediate upside, or 2) a softening share price if no further offers are received (and entertained) and management pursues its Intu acquisition strategy,’ authors Hemant Kotak and Peter Papadakos wrote in the report.
