The EG Interview: St Modwen’s first year with Blackstone

Sarwjit Sambhi has worked in the real estate industry for less than two years, but he has already packed a lot into that time. The former management consultant and energy industry executive had been running developer St Modwen Properties for just a matter of months when, in early 2021, it received a public-to-private takeover offer from private equity giant Blackstone. While getting to grips with the new company, Sambhi steered the deal to completion.  The takeover was one in a wave of mergers and acquisitions during the Covid-19 pandemic. Like many company leaders who helped to lead similar transactions, Sambhi is now relishing the chance to take a more considered approach to running the business. No more fixating on a share price or worrying about how analysts will view the latest trading update or results. Ahead of the anniversary of the takeover completing, Sambhi sat down with EG in St Modwen’s West End offices to talk about what has changed since the company left the public market, how its new ownership can help it face the challenges ahead, and what advice he can offer other real estate chief executives whose companies might soon be on the receiving end of their own takeover offer.  Don’t forget the day-to-day Sambhi spent two decades with energy group Centrica before joining St Modwen as chief executive in November 2020, the permanent successor to Mark Allan, now at the helm of Landsec. An approach from Blackstone “was pretty quickly in the inbox when I arrived”, Sambhi says, landing shortly after the company announced its £121m loss for 2020 in February 2021. The first recommended offer was announced to the stock market in May, valuing the company at £1.2bn, a near-25% premium to its net tangible assets as of the end of 2020.  Sambhi had done deals before, including working on Centrica’s 2009 takeover of listed oil and gas company Venture Production. But this was his first time being on the target-side in a public-to-private takeover.  “For good or bad, not many CEOs have gone through that process,” he says. “For me, it was a great learning opportunity… What were the main lessons? Get the right advice quickly. Are you being thoughtful about when and what you need to communicate to the market? How are you going to arrive at a decision to make a recommendation? Be patient during the process, don’t rush it and recognise that you don’t want this to be all-consuming for the board.” That last point was important for Sambhi – a dealmaker must still keep an eye on the day-to-day business. “It’s easy to slip into the mode of ‘we’ve got a board meeting in a few days to talk about the takeover but I’ve got this site visit in the way’,” he says. “One might find it easy to say ‘let’s cancel the site visit’. But for me, business had to go on – and the best way for me to understand the business is actually being out there.” The Blackstone offer was eventually increased, edging the valuation closer to £1.3bn, before the deal closed on 6 August last year.  No more juggling Private ownership changes the game for Sambhi and colleagues across St Modwen’s housebuilding and logistics arms. Away from the constant scrutiny of public market shareholders, there remains a focus of growth, but with fewer distractions. “It is accelerating the plans and not having to do this juggling act of progressive earnings delivery and dividend payouts, as well as investing in the business,” he says. “It’s the absolute focus on how much you can grow the business and how fast you can grow it. And as long as you’re making the investment return hurdle, then you’ll get the funding for it.” That means more time to build out the business. “[Blackstone’s] appetite to grow the business is very strong,” Sambhi says. “As we all know, its appetite for logistics is and continues to be insatiable. And therefore, from our perspective, its prompt has been, ‘how can we accelerate the plans that you had before?’ It’s been interesting to respond to that challenge.” The company has bought new sites for its housebuilding business and bolstered the logistics pipeline with a £180m warehouse portfolio acquisition from Argo Real Estate and, more recently, spending £80m on a London industrial estate owned by M&G.  It has also reconfigured parts of the business, folding its strategic land business into St Modwen Homes. “We always knew it was most efficient and effective for the business to integrate strategic land into the housebuilding business, and that we were actually missing a trick by not doing that,” Sambhi says. “So far it is working in terms of trying to accelerate the development of some of that strategic plan for the benefit of the housebuilding. And it’s a stronger housebuilding business now as a consequence.” As busy as St Modwen has been on the acquisition front, it is continuing to offload assets that Sambhi pegged as non-core after joining. That includes the 725-acre Trentham retail and leisure estate in Staffordshire, as well as some other retail assets in Farnborough, Hampshire, and Billingham, County Durham. Sambhi says the company should have its disposals wrapped up by the end of this year. When the disposals were announced in early 2021, the company said they were valued at between £180m and £200m. Locked in Sambhi is wary of being too prescriptive over St Modwen’s targets now. The company has made statements about doubling the size of its housebuilding arm, but in conversation he shies from precision when talking about the to-do list. “In terms of doubling homes or tripling logistics, the reality is they are not the targets,” he says. “The reality is: what’s the amount of opportunity that you can pursue? And if that ends up being growing the business five-fold and it meets the returns, we will get investment. So the to-do list is: accelerate your current development pipeline on logistics as fast as you can; look for opportunities to acquire that meet investment returns; continue to grow the housebuilding business at the rate that you have, which means finding new land opportunities in the right regions. And as you grow bigger and you get scale, you improve the returns in the business and improve margins.” The markets are becoming challenging. In logistics, the chief executive sees demand for space holding up for now. “But having said that, we are not being complacent, the fortunes of occupiers are different,” he adds. “We have some customers who are pure e-commerce that have seen sales come down so aren’t using the space they’ve leased as much as they thought they would. Another supplier who serves both online and instore is seeing rotation – lower online sales offset by more instore sales.” And inflation is biting. “On logistics, we have seen cost increases in concrete and steel supply,” Sambhi says. “We have got issues around supply availability and cladding across the market. We were quite quick out of the blocks to secure all of our contracts for this year early in the second half of last year and we cracked on early this year with securing quite a few of our 2023 contracts. For the remaining 2023 portfolio that we have still got to secure, we are going to have to work hard with the contractors to see how we can manage the costs.” Anecdotal evidence suggests some contractors are now wary of locking in prices for all but their most esteemed customers. The issue calls for honest conversations, compromise and some creativity, Sambhi says. “What [contractors are] naturally doing is saying, ‘This component of cost is really volatile so what we will price in is a risk premium’,” he adds. “The right thing to do is to say to the contractors, ‘Don’t build in a risk premium, be more open-book and we could come up with a different contracting structure where you can share some of that risk’. It’s going to require working more innovatively with the supply chain to make sure we are not inadvertently locking in unnecessary higher costs.” Risk or opportunity Sambhi is confident and relaxed as he reflects on the past year and what comes next for him and his colleagues. Maybe that’s a natural consequence of leaving the stock exchange and no longer having to worry about the ups and downs of a share price, an “obsession” that he says “is a waste of energy” for chief executives of public companies. His peers might envy his relative freedom. There will likely be more mergers and acquisitions to come with markets as volatile as they are and the discounts at which real estate owners’ shares trade compared with the value of their portfolios. Sambhi is watching with interest. “The way that I look at it is there’s an opportunity for private equity if they run the slide rule over [a company] and say the discounted cash flow is a lot less than the current market cap of these companies,” he says. “It’s not just real estate – across all of the FTSE, there are a lot of companies that, when you look at analyst reports, are purported to be undervalued. And as long as they continue to be undervalued relative to the DCF, there is a risk – or an opportunity, depending on which side you’re looking at it from.” A year on from Sambhi wrapping up his own £1.3bn sale, he seems to have no doubt that it was always the latter for St Modwen.    To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews