Tuesday 24 October 2017

Soros 'disappointed' by Kennedy Wilson merger

George Soros believes KWE should consider a sale to
George Soros believes KWE should consider a sale to "unafilliated third parties"

Jack Sidders, Neil Callanan and Andrew Blackman

Soros Fund Management is disappointed by the terms of the proposed merger of Kennedy Wilson Europe Real Estate Plc and Kennedy-Wilson Holdings Inc. and says it would welcome a sale of the European company if it were priced and structured appropriately.

In a letter to Kennedy Wilson Europe's board of directors released last Tuesday, the family office of billionaire George Soros urged them to "honour their fiduciary duties and conduct a strategic review of all alternatives available to KWE, including a cash sale to unaffiliated third parties and an orderly liquidation of the company over time".

Soros Fund Management owns about 12pc of KWE.

Kennedy-Wilson Holdings, which owns real estate in the US, Europe and Asia, plans to acquire the remainder of KWE in an all-share deal. The price offered is a 3.4pc discount to KWE's net asset value at the end of 2016, the companies said in April. The merger would improve liquidity and give the combined firms more scale, improving their ability to generate returns for shareholders, Kennedy-Wilson chairman and chief executive officer William McMorrow said at the time.

Shareholders have sold off UK landlords since the country's vote last year to leave the European Union, even as overseas investors have kept faith with real estate and continued to pay high prices to acquire some large London office buildings.

The mismatch has seen landlords such as Land Securities Group Plc and British Land Co. trading at wide discounts to asset values, prompting a wave of M&A activity in the industry.

KWE was "priced for distress along with other UK domestic stocks" after the Brexit vote, despite having about 44pc of its assets outside the country. Darren McKinley, an analyst at Merrion Capital Group, said in a note published last week.

"There is some risk that shareholders from either side do not vote the deal through, but I suspect a slightly higher offer may emerge once Kennedy-Wilson US shareholders realise the value within KWE's portfolio," he said, while describing the current offer as "not unattractive".

Kennedy-Wilson Holdings owns the investment manager that runs KWE and is the company's largest shareholder.

Soros Fund Management said it is also concerned about the process leading to the agreement. "A more robust strategic review has the potential to attract additional value-enhancing offers and thus allow KWE shareholders to make a more informed decision as to the intrinsic value of their shares," it said in the letter.

Both the proposed Kennedy Wilson deal and a bid by Teddy Sagi to acquire Market Tech Holdings Ltd. show investors see Brexit-related property share-price discounts as a buying opportunity.

KWE traded at a 20pc discount to net asset value and Market Tech was at a 11.2pc discount at last Friday's close.

Industry researchers forecast that the Brexit discounts will lead to more M&A in Britain this year.

"If you look at the price of some of the listed UK real estate companies, they are cheap now compared to buying private real estate assets," said Mahdi Mokrane, head of European research at property asset manager LaSalle Investment Management Inc., which oversees €53bn in investments.

"It's hard to pinpoint which companies will be targeted, but we can expect to see more of these deals."

Fears that Brexit could lead to London office buildings falling by as much as a third in value hasn't deterred overseas investors, who continue to pay premiums for modern properties in the UK capital. They've been attracted by the fall in the pound after last year's vote to leave the European Union and the demand has supported the underlying property values of landlords.

The Kennedy-Wilson and Market Tech Holdings offers sent the shares of real estate investment trusts higher.

Great Portland Estates Plc, which renovates older properties, rose as much as 2.1pc to the highest since the Brexit vote. Shaftesbury Plc, the owner of Carnaby Street, rose as much as 1.3pc. Hong Kong billionaire Samuel Tak Lee now holds more than 18pc of the landlord, compared with 5.2pc last June.

KWE's shares rose as much as 16pc initially, the most ever. Shareholders in the firm, which focusses on office, industrial, retail and private-rental properties, will own about 36pc of the combined group.

"The company's stock price has been suppressed by perceptions that it is at risk due to the impact of Brexit, given its holdings in the UK, as well as uncertainty in the other European markets - Ireland, Italy, Spain - in which it operates," BTIG LLC analysts including Mark Palmer wrote in a note to clients.

Sagi will purchase the part of Market Tech, the owner of a large swathe of property in London's Camden borough, that he does not already own through a trust. The 188 pence a share offer values the company at about Stg£892.5m (€1.05bn).

Commenting on the recent activity, Bloomberg Intelligence analyst Sue Munden wrote in a note: "M&A activity has kicked off in the UK listed-property sector."


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