A couple of weeks ago, Michael Cameron spelled out GPT’s new strategy. It would be opportunistic in deploying its $3 billion of balance sheet capacity, driven by asset selection rather than portfolio theory, and set very ambitious targets for expanding its funds under management.
Today Cameron announced a $3 billion takeover offer for Commonwealth Property Office Fund (CPA) that fits neatly within that strategy.
GPT has gate-crashed the CPA-endorsed $2.84 billion rival bid by Dexus Property Group and the Canada Pension Plan Investment Board. It is seeking to exploit the tactical advantage it has over that bid, which involves a scheme of arrangement, by making a conventional offer with a 50.1 per cent minimum acceptance condition.
If successful, the acquisition would give GPT segment leadership in office property, with $10 billion of office assets under management.
With the GPT Wholesale Office Fund agreeing to acquire five properties for $1.1 billion if GPT succeeds in gaining full ownership of CPA, it would also increase the group’s external funds under management by 15 per cent to $8.2 billion. Cameron’s target for funds under management over the next few years is $17 billion, and is part of a plan to lift the level of GPT’s ‘active’ earnings to about 10 per cent,.
The bid is Cameron’s first really aggressive expansion play since he arrived at the then de-stabilised GPT in 2009, although he has kicked the tyres quite hard on a couple of other prospective deals. He has restored it to its conservative, blue-chip past.
The bid is a bold one. GPT has a market capitalisation of about $6.2 billion and the offer, including the GPT Office Fund’s borrowings, will involve outlays of about $4 billion in scrip and cash. Assuming the Office Fund transaction does occur, GPT would still retain relatively conservative gearing of 32 per cent and the acquisition would add at least 3.5 per cent to its earnings per security and 30 to 40 basis points to its long-term total return.
To succeed, GPT does need to overcome Dexus and its Canadian partner. The GPT offer of 0.141 GPT securities and 75.325 cents per CPA security values CPA securities at $1.272 each and compares with a rival offer that values CPA at $1.219 per security.
The advantages GPT has over a scheme are certainty and earlier payment and the scheme's need for least 75 per cent of the securities voted to endorse the offer. Dexus and Canada Pension Plan have a 14.9 per cent stake in CPA, which wouldn’t be able to vote at the scheme meeting, effectively raising the bar required for approval.
GPT also says it has the support of other security holders including Mondrian Investment partners, which owns about 8 per cent of CPA and believes the GPT bid is superior to the current Dexus offer.
Dexus and Canada Pension Plan have agreed to pay $41 million to Commonwealth Bank for the management rights to CPA. GPT, which has pre-bid agreements to acquire about 6.5 per cent of CPA, isn’t proposing to buy those rights.
Unlike Dexus, GPT doesn’t intend to conduct a due diligence investigation of its target, which helps shorten the timelines of an offer that should be lodged with CPA within a fortnight. Fortuitously, GPT’s chief investment officer Carmel Hourigan previously spent five years managing CPA and was responsible for acquiring 16 of the 25 properties in the fund.
Cameron believes the acquisition, if it succeeds, is being made at the right time in the cycle for office properties, with the capitalisation rates for prime office properties currently above historical averages and an expectation that there will be an upturn in values in the near term.
Acquiring CPA would add to the diversity and quality of GPT’s portfolio and also to its options for shifting assets into its wholesale funds to generate more funds management income.
Because the bidding for CPA is now contested, there is the potential for further developments in the bidding, although the Dexus/Canada Pension Plan offer has already been increased once to win CPA’s endorsement. Having made his big move, however, Cameron will be reluctant to walk away from it.