Lendlease may dodge a split after HMC Capital showed confidence by increasing its investment

Activist investment house HMC Capital wants Lendlease to speed up its recovery but is not seeking the company’s break-up.

HMC Capital managing director David Di Pilla. Picture: Jane Dempster

Investment house HMC Capital has become a substantial shareholder in embattled developer Lendlease and is pushing for it to take a more focused approach to lifting returns but is not backing the push for a dramatic split of the business.

HMC’s flagship wholesale fund lifted its holding in the developer in the wake of its dramatic profit warning in February and has taken its stake, along with HMC’s own stake, to 5.01 per cent, making it one of the developer’s largest shareholders.

The David Di Pilla-led investment company had been pushing for the company to speed up its efforts to improve its financial position since taking a stake last year and its latest burst of buying will increase its influence and lessen the chance of a potentially risky break-up of the group.

The $4.4bn company was rocked last week when John Wylie’s Tanarra Capital wrote to Lendlease’s board demanding it consider carving off the company’s underperforming international operations, under which a slew of assets worth about $4bn would eventually be sold off.

That plan would result in Lendlease becoming a local developer and builder, along with a funds management unit and a successful Singapore operation, in an attempt to regain value after deep losses in recent years.

Lendlease chief executive Tony Lombardo. Picture: John Feder

Tanarra’s idea won support from investment house Allan Gray, which had privately put forward plans to Lendlease of a restructure.

Lendlease is preparing a response that could be unveiled at next month’s strategy day but HMC raising its stake and its belief the developer should focus on selling off non-core assets makes pursuing a demerger less likely.

The developer has a trio of investment banks – Macquarie Capital, Morgan Stanley and long-time adviser Gresham – assessing options, including weighing up the company split.

Mr Di Pilla has been critical of the company’s poor delivery for shareholders but is backing the turnaround strategy put up by chief executive Tony Lombardo.

“Lendlease’s performance has clearly been disappointing, and it is evident that more decisive strategic action needs to be taken by the company; we are confident the board and management team understands this and recognises the upcoming investor day will be a critical opportunity to clearly communicate a revised strategy to the market,” he said.

“We believe the initiatives the company has already articulated are moving in the right direction – namely repatriation of capital from offshore back to Australia which includes scaling back offshore construction, reducing exposure to long-dated lower return on equity investments and projects and ongoing progress on cost efficiencies.”

In a recent investor update, the HMC-run fund praised the sale of the Lendlease’s housing estate business to Stockland and a Thai partner at a 20 per cent premium to book value as it took a dilutive equity raising off the table.

“We believe that decisive execution of this strategy should remain the key focus of the group leading into the upcoming investor day,” Mr Di Pilla said.

“We are supportive of Tony Lombardo and the Lendlease board and management team taking bold steps to accelerate and extend these initiatives even further – resulting in a leaner, more capital efficient business with a focus on the Australian and Asian markets and its core urban redevelopment capability.

“We have seen the recent Lendlease share price weakness as an opportunity to add to our strategic holding.”

Lendlease noted HMC’s share buying. “We believe HMC’s decision to increase its holding is recognition of Lendlease’s underlying value and management’s ability to realise this value over time on behalf of security-holders,” a spokesman said.

Originally published as Lendlease may dodge a split after HMC Capital showed confidence by increasing its investment