ARA Asset Management will be making history if it succeeds with plans to launch a $518m proportional takeover of Cromwell Property.
The proposal from the Warburg Pincus-backed ARA emerged on Tuesday. It is offering 90c a share to increase its holding in Cromwell from 24 per cent to 49 per cent, buying up an additional 29 per cent of the shares in the Brisbane-based real estate group that it does not already own for $518m.
Cromwell told shareholders to take no action.
Fewer than 10 proportional takeovers have ever been launched in Australian corporate history, with one of the more recent high-profile transactions involving the proportional takeover of Leighton Holdings by ACS-controlled Hochtief.
Leighton (now called CIMIC) was subject to a $1.2bn proportional bid that resulted in Hochtief taking control of just under 70 per cent of the company in 2014.
At the time, the logic was that Leighton would benefit from being Australian-listed when it came to winning projects and offering an element of protection on business dealings. But CIMIC has failed to deliver from a shareholder value perspective and has lost $7.5bn from its market value in the past year.
Typically, proportional takeovers are not popular with shareholders because they offer the suitor more control at a limited premium.
Yet sometimes the deals are considered positive, such as in situations where two companies involved have synergies and cross-relationships and a tie-up could streamline boardroom decision-making.
In the case of the ARA proposal, the premium is a skinny 3.4 per cent on the last closing price of 87c. It is seen as a way for ARA to creep up the register at a very tight price.
While Cromwell, which is advised by UBS and Goldman Sachs, could find another suitor to offer a superior proposal, most see its $1bn of Polish shopping centres that it placed on its balance sheet late last year as a poison pill.
The plan was always understood to spin off the centres into a fund, but this is not expected to be an easy task.
ARA’s aim is to secure boardroom control, sell the Polish assets, which sources close to the company suggest will have to be offloaded for a lower price than that paid by Cromwell, and also offload other properties to drive down gearing levels.
The thinking is that making a full takeover bid, which would be valuing the company at $2.35bn at 90c a share, was a cheque too large to write for ARA.
The asset manager counts private equity firm Warburg Pincus as a 48 per cent shareholder and has called on advisers Moelis, Credit Suisse and law firm Arnold Bloch Leibler for help.
The offer is funded through a combination of its balance sheet and commitments from affiliates of certain shareholders, which include CK Asset Holdings, Straits Trading and Warburg Pincus.
They no doubt take the view that now is not the time to be taking big bets on real estate amid an uncertain environment amid the COVID-19 pandemic.
The bid follows a prolonged battle between ARA and Cromwell where ARA has claimed concerns with Cromwell’s operating performance, strategy and governance and made efforts to assert more control through boardroom representation by nominating representative Gary Weiss to the board.
In previous equity raisings, ARA has been excluded, which has diluted its holding and forced it to stump up more funds to maintain its level of interest. About $700m is estimated to have been invested by ARA.
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