Capco to demerge by December

Capital & Counties Properties is to push forward with a demerger of its business into two separate entities by December, as the value of the Earls Court Partnership slides again. Capco plans to create two independent businesses: Covent Garden London and EC Properties. It will seek to turn its Covent Garden business into a REIT, targeting long-term returns. It will also seek to roll its £173m 50% stake in the Lillie Square residential project, close to its Earls Court scheme, into Covent Garden. EC Properties will include Capco’s 63% stake in around 27 acres at Earls Court that it owns with TfL. It will be led by current senior independent non-executive director Gerry Murphy as chairman and Capco managing director Mike Hood as chief executive. After demerger costs, the company will retain £145m in cash, with a net cash position of £100m. The value of this site was £389m at the end of June, according to Capco’s latest valuation, down 16% from £461m at the end of December. The firm said the demerger would also allow the company to “realise the value of its Earls Court land interests over time”. This week, Capco financial director Situl Jobanputra said the value of the land at Earls Court was currently around £23m per acre. It has ranged in value between £45m and £20m per acre since 2007. Covent Garden London was independently valued at £2.8bn on 30 June. It will continue to be led by Henry Staunton as chairman and Ian Hawksworth as chief executive. It will have a loan-to-value ratio of 27%. Capco is targeting a combined administration cost of £30m for the two businesses by the end of 2020. Currently, Capco’s run costs are around £35m, down from roughly £52m three years ago. Hawksworth admitted he had “pleasantly forgotten how much work [a demerger] was after the last one [when Liberty International spawned Capco around 10 years ago]”. He had said previously in the firm’s half-year results that “separation of the two estates would enhance strategic flexibility and allow each business to pursue independent strategies and deliver long-term value for our shareholders”. Fresh details of the demerger, first confirmed as a potential option in May, came after the firm explored the sale of part or all of its Earls Court interests. Most recently, Canary Wharf Group emerged as a potential suitor for the scheme. Capco has also held discussions with CK Asset Holdings and reportedly received a bid from Berkeley Group. The firm said proposals had been at a range of discounts to the balance sheet value and that there was “no certainty of a sale transaction”, with the demerger now understood to be receiving the management team’s focus, rather than sale talks. Nonetheless, some analysts thought a sale was still possible. “There is still a good chance that Earls Court will end up being sold,” said James Carswell, real estate equity analyst at Peel Hunt. However, he pointed out that the Earls Court interests could in the medium term end up in a private vehicle of some sort. Carswell added that the announcement was nonetheless disappointing for shareholders. “We were hoping for a sale, obviously depending on the price, but had that been at any moderate discount that would have been pretty good for shareholders,” he said. Hemant Kotak, managing director of Green Street Advisors, agreed that a sale of Earls Court was still possible “if management can find an investor willing to play the long game and look through the Brexit noise”. [caption id="attachment_990960" align="aligncenter" width="847"] Earls Court[/caption]