M&A opportunities: what are the chances?

With the transactional market quiet (save from the odd £1bn skyscraper sale), major listed companies trading at a discount to their net asset value, and the world awash with cash, many financial advisers and those with equity are eyeing M&A opportunities. Here, research compiled by Green Street Advisors shows which firms it believes make for the most attractive takeovers. The research does not imply that those listed are takeover targets, but shines a light on options currently being weighed up. While many talk of discount to NAV being a key factor in a firm’s attractiveness to potential suitors, Green Street says it is not the only factor. It bases its probabilities for takeover on NAV premium/discount to share price and overall return prospects for the portfolio, plus more qualitative issues such as scarcity level and the deemed interest level of potential investors. The estimates are a rough guide at a point in time, and subject to change as market conditions change. Hispania tops the table because there have already been announcements about the future of the company, and the fact it wants to sell off its assets by 2020. “There is a lot of overseas capital around, and that’s a potent cocktail for M&A,” says Stifel’s Alan Carter. “Theoretically, the most efficient way to access one of the big companies is M&A. But that would be a hostile takeover and the discount would be wiped out.” The UK companies with the highest take-out chances are Hansteen, Great Portland Estates and Grainger. [caption id="attachment_814098" align="alignright" width="300"] Great Portland Estates owns 73-89 Oxford Street, W1[/caption] Hansteen is seen as attractive because of the high yields that the light industrial sector it specialises in throws off and the potential for its assets to be utilised as last-mile delivery facilities. Hansteen joint chief executives Ian Watson and Morgan Jones said of the company’s full-year results on 20 March 2017: “The gap between the high net yield of our properties and the low average borrowing costs leads to one of the highest normalised income profits in the sector. “This, in turn, has translated into a consistently progressive and high dividend. “The performance of our properties since Brexit has highlighted the robust and attractive nature of our business and it is clear that there is an increasing appreciation of the sector’s strengths from the investment community, which we believe is leading to improving investment values and liquidity.” Great Portland Estates is at number six in the list, not because of its discount to NAV, but because of the long-term potential performance of London property. In a trading update on 6 July, chief executive Toby Courtauld said: “GPE is in great shape with exceptional long-term potential: our recent refinancing successes and four years of net sales activity gives us unprecedented financial capacity; our investment portfolio is well let, off low average rents and with significant reversionary potential; our remaining committed development programme is materially de-risked, being 67% prelet or presold with strong tenant interest in much of the balance; our exceptional income-producing development pipeline offers more than 1.7m sq ft of flexible future growth potential; and we have a first-class team ready to capitalise on this period of uncertainty.” Grainger is in the top 10 because of the difficulty assembling a UK residential portfolio such as its own. Chief executive Helen Gordon said in its half-year results on 19 May: “The undersupply of housing and the growing demand for rental housing presents an exciting growth opportunity. “Grainger is in a strong position to capture this opportunity, having developed a scalable, efficient operating platform. “Grainger’s business model is increasingly focused on driving sustainable income-led shareholder returns and our strategy, operational infrastructure and pipeline provide us with confidence for the future.” The analyst’s view: Hemant Kotak, managing director, Green Street Advisors There is no scientific model for working out the chances of a take-out, but there are a host of considerations. The first, and often the largest, is how big the initial discount is. This is a good starting point, but not always the whole story. Then you need to consider the prospects for the portfolio. Is the company operating in a market about to face a downturn, or is it still registering positive trends? If you have a discount but the underlying fundamentals are still healthy, that increases the odds. Bringing together these two factors will allow you to estimate look-forward unlevered returns for the portfolio in an absolute sense. By way of example, an REIT trading at a 20% discount to NAV could have an implied unlevered IRR of 6%, but a REIT trading at NAV may still offer higher unlevered returns if the outlook is positive enough. Next you must consider how much of a portfolio premium should be ascribed to those assets – and here there are a whole range of factors; from underlying scarcity, to platform efficiencies and, ultimately, the boost from currently available low-cost financing. All of these things bring into play potential levered returns for investors, which rightly or wrongly, is perhaps the most important consideration for many deals. Of course, the ultimate success of a takeover bid will depend on how supportive the management is and whether shareholders collectively havebetter uses for their capital. However, by the time the takeover premium and fees are considered, much of the original discount to NAV may have evaporated. For investors where gaining a controlling interest is not imperative, and there in nothing to fix per se, the alternative is to build up a position in multiple companies. Investors prepared to do this will be of the view discounts offer genuine value, and not a precursor to a downturn. To send feedback, e-mail alex.peace@egi.co.uk or tweet @egalexpeace or @estatesgazette