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Tussle over Fountainhead assets

Nov 04 2012 14:37 Elma Kloppers

Company Data

GROWTHPOINT PROPERTIES LIMITED [JSE:GRT]

Last traded 24.50
Change 0
% Change 0.00
Cumulative volume 13192442
Market cap 51.30bn

Last Updated: 23/04/2014 at 04:27. Prices are delayed by 15 minutes. Source: McGregor BFA

FOUNTAINHEAD PROPERTY TRUST [JSE:FPT]

Last traded 7.84
Change 0.02
% Change 0.00
Cumulative volume 686655
Market cap 9.12bn

Last Updated: 23/04/2014 at 04:25. Prices are delayed by 15 minutes. Source: McGregor BFA

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Johannesburg – The tug of war between the country’s two major listed property groups, Redefine Properties and Growthpoint Properties [JSE:GRT], for the Fountainhead Property Trust [JSE:FPT] assets is an untested area.

The outcome could break new ground for the property sector.

The tussle could even go to court because so much is at stake for Redefine if Growthpoint’s bid should succeed.

At issue is the R684.5m that Redefine has forked out for Fountainhead’s asset management company to acquire the trust’s attractive assets.

If its competitor’s better counter-bid for the assets should succeed, the asset management company runs the risk of losing future management fees. The annual management fee normally amount to about 0.5% of the enterprise value (market value plus debt).

Previously acquisitions of a property trust’s property portfolio have been accompanied by acquisition of the asset manager. Where the test now comes is that Growthpoint has no plans to compensate the asset management company for loss of future income should its offer prove successful.

Growthpoint chief executive Norbert Sasse says that because they manage their assets internally they don’t need an asset manager.

Redefine chief executive Marc Wainer says if the asset manager sells the assets and fails to replace them with other revenue-generating assets, from a legal standpoint the asset manager has to ensure that both unitholders and the asset manager are adequately compensated.

Sasse says the asset manager is obliged to manage the trust’s assets at all times in a manner that benefits unitholders.

The asset manager must therefore avoid conflict with the unitholders and not use its role as manager to promote its own independent interests.

He says the asset manager’s potential loss of future management fees does not affect the interests of Fountainhead unitholders and should by rights therefore not be a factor when considering Growthpoint’s offer.

Wainer says the final decision on which bid should be accepted will rest with the asset management company’s board, which consists of five independent directors and two Redefine directors.

Advisers have been appointed to compare the offers, after which the board will make a recommendation to the Fountainhead unitholders.

He says the Financial Services Board will not pronounce on the matter as it is not a regulator.

He believes that Growthpoint will have to overcome several obstacles to have its bid accepted. Despite the counter-offer Redefine is leaving its bid unchanged because it believes it to be reasonable.

Redefine's indicative offer involves three Hyprop units and 62.5 Redefine units for each 100 Fountainhead units held, and Growthpoint’s provisional offer 35 Growthpoint units for each 100 Fountainhead units.

Sasse says the offer will be favourable for both Fountainhead and Growthpoint unitholders and be positive for future distributions.

He says what makes Fountainhead’s assets so appealing is that more than 70% of them are based on attractive shopping centres in terms of value.

Although Growthpoint has successfully grown over the years, it has been difficult to find worthwhile quality assets in the retail environment as these seldom come to the market, Sasse says.

A deal such as this could considerably enlarge its retail exposure.

Fountainhead’s property portfolio has 67 properties. The best known include Centurion Mall, Southgate Mall and Westgate in Gauteng, as well as Blue Route Mall and the N1 City shopping centre in the Western Cape.

Redefine’s dilemma

Property analysts are unsure how the battle between the two giants will play out, especially as there is no legal precedent to which one can refer and no clarification in the trust deed.

Paul Duncan, an investment analyst at Catalyst, says there are various scenarios, including a realistic one that the asset management board makes a recommendation to unitholders that neither of the bids is sufficient to compensate them for the assets. That would also be the easiest option.

He says Growthpoint is serious about its offer and can afford to increase it as it does not need to pay for the asset management company.

Redefine, on the other hand, will find if difficult to raise its offer because it has higher capital costs than Growthpoint has.

Duncan believes that, should Growthpoint succeed in acquiring the assets, this could cause a shakeup in the property industry, especially for other property funds which are also managed by external asset managers.

“The biggest impact could be the funds becoming targets for corporate activity, he says.

Evan Jankelowitz, a director at Sesfikile Capital, says it's a difficult situation but, if Growthpoint succeeds, the loss to Redefine will be greater than the benefits unitholders will derive from their Growthpoint shareholding.

What is concerning, he adds, is that Standard Bank Properties and Liberty Holdings walked away from the asset management company with R684.5m, leaving unitholders to their fate after Fountainhead had underperformed for years.

The offers

  • Redefine

Three Hyprop units and 62.5 Redefine units for each 100 Fountainhead units held. Offer per unit: R7.52

  • Growthpoint

35 Growthpoint units for each 100 Fountainhead units.

Offer per unit: R8.36

(Fountainhead closed at R7.90 on Friday.)

 - Sake24

For more business news in Afrikaans, go to Sake24.com.

growthpoint  |  redefine properties
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