SA investors who bailed out of Capital & Counties Properties (Capco) after it demerged from Liberty International in 2010 are likely to reconsider exposure to the London-focused property play given plans to merge with fellow LSE-listed Shaftesbury.
When the late Donald Gordon’s Liberty International split into Capco and Intu, more than 50% of Capco’s shareholders were South Africans. That number has over the past 12 years dwindled to an estimated 10% — partly on the back of Capco’s initial development focus.
Local property fund managers typically perceived this strategy as a more unpredictable bet than a portfolio of completed, income-producing buildings.
Some also believe the investment strategy lacked clarity given Capco’s former exposure to a mix of seemingly disparate sectors, including a residential development and exhibitions business in Earls Court and a mix of assets at the Covent Garden eat, shop, live and play precinct.
However, Capco has over the past 12 years unlocked most of the development opportunities at Covent Garden and it sold Earls Court in 2019. In 2020, it bought a 26.3% stake in Shaftesbury, which owns a mix of retail, office, leisure and residential properties in London’s fashionable West End, which has paved the way for a merger.
Analysts welcome the proposed deal given that the portfolios of the two companies are highly complementary. Both sets of shareholders will vote on the transaction on July 29.
Garreth Elston, an independent offshore analyst, says a merger will strengthen Capco’s strategic focus on mixed-use properties in the West End away from the development aspect, which should create more predictability from a returns point of view.
Elston says there will also be recurring cost synergies of an estimated £12m (pretax) a year due to the rationalisation of senior management and cutting of operational and listing costs.
The new entity, to be named Shaftesbury Capital Plc, will retain its listings on both the LSE and JSE. A successful merger will see the value of Capco’s (£1.8bn) and Shaftesbury’s (£3.2bn) combined portfolio swell to £5bn (about R100bn), placing the group as the LSE’s biggest central-London property owner.
Together the companies own nearly 2,000 lettable units across 670 buildings in some of London’s trendiest mixed-use hubs including Carnaby, Soho, Fitzrovia and Covent Garden.
“The quality, location and scale of the combined portfolio in one of the world’s leading capitals, in one of the city’s most iconic retail, dining and entertainment destinations, is difficult to match,’’ says Elston.
However, he notes that the journey to a fully functioning merged entity will take some time. So too will the UK’s post-Covid economic recovery. “But patient investors should be well rewarded,” says Elston.
Nicolas Lyle, property analyst and portfolio manager at Stanlib, agrees that a merger has both strategic and financial merits and provides upside potential for existing Capco shareholders.
Lyle says the merged entity will nevertheless be relatively low yielding from a dividend point of view, given the combined portfolios’ “prized” valuations in the heart of London.
Patient investors should be well rewarded
— Garreth Elston
Capco is now trading at a forward dividend yield of just over 1%, which should grow modestly by 0.5%-1% in 2023 after the merger. He says: “The enlarged entity will therefore remain a capital growth play.’’
Lance Bezuidenhout, investment analyst and portfolio manager at Catalyst Fund Managers, says the deal has been cleverly engineered, allowing Capco shareholders to benefit disproportionately.
The merger constitutes a reverse takeover of Shaftesbury by Capco. Shaftesbury shareholders will receive an exchange ratio of 3.356 new Capco shares for each Shaftesbury share owned and would end up owning 53% of the combined group.
Bezuidenhout reckons the significant overlap across the two portfolios will be highly complementary, which will allow the company to amass scale and better control its combined West End operations.
“This will create operating efficiencies, driving both cost and revenue synergies, while the increased company size should allow for a larger investor base and improved liquidity,’’ he says.
Ian Hawksworth, CEO of Capco who will retain his position after the merger, conceded in a recent investor presentation that the West End economy won’t be insulated from rising interest rates and inflation, geopolitical risks, supply chain problems and labour shortages.
However, the merger presents a rare opportunity for investors to gain exposure to an “exceptional mixed-use portfolio that will be impossible to replicate’’.
Hawksworth said: “The area has proven its long-term resilience as a global destination. Visitor numbers have recovered strongly since mid-2021 and are trending close to pre-pandemic levels of 200-million visitors a year.’’
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