It isn’t surprising that two of the dwindling number of big listed property groups have held discussions about ‘potential transactions'. Everyone in the industry has held talks, at one time or another, to see whether they can squeeze one last bout of consolidation out of an already concentrated sector.
The fact that Lend Lease and Mirvac have acknowledged talking, and that Lend Lease has insinuated it was the smaller Mirvac, or an intermediary representing Mirvac, that approached it ("Lend Lease…from time to time considers proposals from third parties…") has, however, raised some eyebrows in the industry.
The appeal of a deal to Lend Lease – if a deal with appeal exists – would appear fairly straightforward. Its protracted and ultimately ill-fated attempt to acquire GPT was predicated on a view that it needed to balance the lumpiness and riskiness of its international construction activities with GPT’s more passive property rental income streams. It also wanted a bigger presence in the property funds management sector and saw GPT as a vehicle into which it could on-sell its more attractive development properties and extract both development profits and annuity income.
Mirvac, while it has its own development activities – mainly residential projects and apartments – is essentially a domestic property and property funds management play. That could be attractive to Lend Lease, whose project pipeline is heavily oriented towards the UK and US, although it's questionable whether this is the right time in the Australian property cycle to acquire exposure to the residential development segment. At this stage it appears Lend Lease has yet to come to any conclusions about the merits or otherwise of any kind of deal with Mirvac.
It’s harder to see the logic of a deal from Mirvac’s perspective, although bringing the two groups together would create a very large institution – Lend Lease has a market capitalisation of about $8 billion and Mirvac about $6 billion. Mirvac would risk being shifted out of the listed property trust classification and into construction and development, which could see it de-rated.
It may be that Mirvac is being opportunistic. The rest of the big end of the sector, which generally has large exposures to the UK and US property markets, has been hit by the impact of the credit crisis. Mirvac’s securities, without large exposures offshore and buoyed by consistent talk of takeovers, have traded up to record levels.
There has been speculation that any transaction would be executed through a reverse takeover – Mirvac would bid for the larger Lend Lease but Lend Lease and its shareholders would end up with control of the enlarged group – which could be an attempt to use highly-priced paper as currency at a time when Lend Lease shares have fallen. Prospective rivals face the same issue of a devalued currency.
The problem for a Mirvac in this market is that the domestic property sector has been so consolidated and securitised that the opportunities for growth have shrunk, which is part of the explanation for the rapid expansion of the rest of the sector into offshore markets.
It may be that nothing comes of the talks. Both sides say there is no expectation or certainty that any transaction will result from the discussions and it appears the discussions were very preliminary. The fact that any discussions were held at all, however, signals the remaining participants are still searching for the endgame in the sector's consolidation. We’ll have to wait to see whether a Mirvac/Lend Lease deal will become part of that endgame.