Second prize isn't so bad for Stockland

Until today, Stockland’s chief executive Mark Steinert would have been increasingly confident of the prospects for the success of his $2.5 billion bid for Australand. With his revised and final bid now trumped by Singapore’s Frasers Centrepoint, he may have to contemplate accepting a consolation prize.

It was only a week ago that Steinert raised his mainly scrip offer and won access to due diligence from an Australand board which had previously been dismissive of Stockland’s merger proposal. That offer of 1.124 Stockland shares (with the potential of a $250 million cash component) valued Australand at about $4.35 per security.

Today, Frasers Centrepoint emerged with a $4.48 per security all-cash offer that values Australand at about $2.6bn, or a 21 per cent premium to the group’s foreshadowed net tangible asset backing of $3.68 per security.

Quite apart from the fact that Stockland had declared its offer final, there were already murmurings of discontent among its own securityholders about the premium over net assets Stockland itself was prepared to pay to merge with Australand.

 Even with the upwards revision of Australand’s asset backing, a bid that topped Frasers Centrepoint’s (and which contained a sufficient premium over it to offset its all-cash nature) would be difficult to justify.

The game isn’t quite over for Stockland. The Frasers Centrepoint offer is an “indicative non-binding proposal” at this stage. It is conditional on exclusive due diligence (which Australand has granted, withdrawing Stockland’s access), has a minimum acceptance condition of 50.1 per cent and is also conditional on Foreign Investment Review Board approval.

It is conceivable (albeit improbable) that after taking a good hard look at Australand from the inside, the Singaporeans might decide not to proceed.

It is also possible that Stockland’s security price might keep it in the game. In the immediate aftermath of the emergence of the rival bid it was up 10 cents per security, lifting the value of its offer above $4.50 and therefore above Fraser Centrepoint’s bid, before taking into account Australand’s first half distribution of 12.75 cents per security.

That may be temporary. It is inevitable that there was some hedge fund/arbitrageur activity in the market, shorting Stockland and going long Australand, after Stockland first emerged. The unexpected entry of Fraser Centrepoint would cause those trades to be unwound and the Stockland price to rise. If sustained, that might keep it in the game.

If they do go ahead with the offer, however, Steinert would have the option of taking a tidy second prize.

Stockland took a risk earlier this year when it grabbed a 19.9 per cent stake in Australand ahead of its offer. That $435m plunge onto the register was designed to deter any potential rivals for Australand as well as get the Australand board’s serious attention.

Evidently it hasn’t deterred Frasers Centrepoint, but the all-cash nature of the offer it has outlined would create an easy exit for Stockland and a profitable one.

If it chose to sell into the offer-- and it would be unlikely that Steinert would leave $435m tied up in a minority stake just to prevent Frasers Centrepoint from gaining full ownership -- Stockland would walk away with a gross profit of just over $80m. That isn’t a bad return for less than three months’ effort.

In the absence of the rival offer, had its own bid failed, it would have had to dump the Australand securities to extract its capital.

Frasers Centrepoint, one of Singapore’s largest property groups, does have a pre-existing but relatively modest presence in Australia and a stated strategy of building its businesses in Australia and China. Its bid for Australand, if successful, would deliver the Australian leg of the strategy, albeit at a rather big price.

It would also mean that Steinert would have to look elsewhere if he still wants to expand Stockland through an acquisition. Australand was a very good fit with Stockland’s portfolio and would have delivered significant synergies. There aren’t many obvious alternatives that would be as complementary.