Strong returns in the listed property sector have contributed to the revival of M&A activity in France, according to Peter Papadakos, an analyst at Green Street Advisors.
Strong returns in the listed property sector have contributed to the revival of M&A activity in France, according to Peter Papadakos, an analyst at Green Street Advisors.
'The main French property firms are trading at a slight premium at the moment and this helps because companies that want to be acquisitive can use their stock as currency to finance the deal,' Papadakos told PropertyEU.
In total, the French listed property industry has posted a return of 18.2% in the second quarter of the year, according to the GPR 250 Europe Index.
Meanwhile, the industry has seen a string of M&A deals, including a €21 bn merger plan between listed French retail specialist Klépierre and its Dutch peer Corio. Following the tie-up, Unibail-Rodamco will remain market leader with almost €27 bn in shopping centre assets.
Under the terms of the merger deal, Corio shareholders will receive 1.14 Klépierre ordinary shares for each Corio ordinary share in a deal valuing Corio at €7.2 bn including debt. The exchange ratio represents a 15.6% premium on the closing price of €35.8 per Corio share on 28 July 2014.
According to Peter Papadakos, analyst at Green Street Advisors, the pricing for Corio is 'as high as Klépierre could have afforded without destroying shareholder value'. Papadakos reckons that the deal will generate some 'very credible' synergies in the next three years. Green Street estimates synergies at €45 mln.
But the premium that Klépierre is paying will offset pretty much all of the forecasted synergies, he added. The transaction is forecast to result in a 2% dilution of Klépierre's proforma Net Asset Value.
LOW-HANGING FRUIT
Klépierre will likely retain only the top 25 or so shopping centres held by Corio and divest the remaining 30 over time, Green Street Advisors' Papadakos wrote in a note to clients. 'On the one hand, the quality of Klépierre's portfolio will take a step back [with this deal]. On the other hand, with Simon Property at the steering wheel, Klépierre may accelerate value creation in the Corio portfolio, which has been undermanaged for the past decade. At least the assets offer plenty of low-hanging fruit,' he said.
While the Klépierre-Corio alliance grabbed the headlines, it is by no means the only M&A deal in the works. France boasts one of the most mature listed property industries and M&A activity in its listed property sector has been particularly prolific over the summer. ‘The main French property firms are trading at a slight premium and this helps because companies that want to be acquisitive can use their stock as currency to finance the deal,’ noted Papadakos.
In early June, French REIT Eurosic agreed to acquire an interest of nearly 89% in peer SIIC de Paris from shareholders Société Fonciere Lyonnaise and Realia, in a deal which gives it full control of the €1 bn business park landlord. In total, Eurosic is forking out €870 mln for the combined 89% shareholding in SIIC de Paris, and it plans to buy out the remaining 11% stake in a second stage. The acquisition will enable Eurosic to double its portfolio to almost €3 bn from €1.4 bn at present.
According to Papadakos, the main driver of the deal is Eurosic’s willingness to increase its critical mass, rather than the pure economics of SIIC de Paris’ portfolio. ‘This acquisition is consistent with Eurosic’s strategy to expand outside core Paris,’ he said. Eurosic’s largest shareholder, Charles Ruggieri’s Batipart had been implementing the same strategy focused on regional markets in the over 15 years that it managed Foncière des Régions, the property company it previously owned.
SURPRISINGLY STRONG PRICE
Similarly, Société de la Tour Eiffel (STE) is being taken over by French mutual insurer SMABTP after a year-long battle for control with an existing shareholder, French-Vietnamese investor Chuc Hoang. SMABTP, the leading insurance group in France for the construction and public works sector, is paying a ‘surprisingly strong price’ to take control of STE, according to Papadakos. SMABTP has offered €58 a share for STE, a 20% premium to the weighted average market price of the company’s shares in the 12 months preceding the filing of the initial offer. The offer is in line with the company's EPRA triple net NAV of €58.10 at year-end 2013.
‘The pricing demonstrates the strength of the investment market in Paris offices but is also an indication of SMABTP’s willingness to raise its exposure to real estate,’ Papadakos said. SMABTP said it plans to strengthen STE's capital base and allow it to double its portfolio over the next three to five years.
Meanwhile Gecina, a €11 bn developer-investor, has lost its major shareholder, Spanish property group Metrovacesa, and acquired Norway's Norges Bank, France’s Credit Agricole Assurances, US investor Blackstone and Canada's Ivanhoe Cambridge as new cornerstone investors in a deal valued at €1.5 bn.
With this deal, the new shareholders are hoping to benefit from forecast rental growth in the Paris office sector after its disappointing performance over the past couple of years. ‘These investors believe in the cyclicality of the office market, and Paris is expected to show rental growth in the near future,’ commented Green Street’s Papadakos.
The analyst said he expects rental growth to amount to a cumulative 10% over the next five years, with the submarkets of La Défense and the Central Business District outperforming the other districts as a result of a lack of supply.
‘When rental growth starts to kick-in, Gecina will be well positioned as its portfolio offers plenty of refurbishing capex opportunities,’ he commented.
On the other hand, the timing of Icade’s takeover of Silic launched in late 2011 was less fortunate, in Papadakos’ view. ‘Icade paid a very full price for Silic but because of the weakness of the Paris office market in the past two years, this has been a bad investment decision. All the synergies generated by the deal were paid for in the terms of the exchange ratio. In other words we believe that the Icade shareholders were no better off from the merger,’ he said.
BENEFIT OF HINDSIGHT
Icade, the property arm of Caisse des Depots, completed its tender offer for Silic in February 2014. The move, involving the exchange of five Icade shares for every four Silic shares, created the largest business park owner in France with a portfolio of over €10 bn. Papadakos: ‘With the benefit of hindsight France’s largest M&A deal for the past four years has been disappointing.’ Icade’s shares are currently trading at a 5% discount to Net Asset Value.
In general, corporates tend to point to operational synergies, easier access to capital as well as higher liquidity of the stock as the main advantages of a merger or an acquisition. In reality though, a merger is hardly ever a real success story, Papadakos said.
‘While in theory there are many reasons why these companies should get bigger, in reality a larger size only helps to drive down the cost of debt, for example through access to the unsecured, covered bond market, and to increase the portfolio’s occupancy rate, when the landlord gets so big that it can serve clients on their entire property portfolio. But, more often than not, the financial benefits deriving from operational synergies are offset by the high price paid for the deal.’
Virna Asara
Correspondent France, Italy and Spain