Steinert can still breach Australand's battlements

Stockland doesn't have a great deal of room to manoeuvre on its rebuffed Australand bid, and its 19.9 per cent stake is a double-edged sword. But Mark Steinert has a few advantages up his sleeve.

Stockland’s Mark Steinert has been rebuffed in his first overtures towards Australand. With $435 million locked up in Australand securities, however, it’s unlikely that his target’s rejection of his scrip-based proposal is going to deter him.

It was obvious when Stockland snapped up a 19.9 per cent interest in Australand last month -- as that group’s former majority security holder sold out its residual 39 per cent stake -- that, with such a big chunk of capital tied up in Australand, Steinert would move relatively quickly. And he has.

Australand revealed today that Stockland had proposed an offer of 1.111 of its own securities for each Australand security.

At face value that would appear a derisory offer. With Stockland securities closing at $3.78 yesterday the terms imply a value for Australand of $4.20 per security – below Australand’s own closing price of $4.28.

Before Singapore’s CapitaLand group sold out of Australand last month and Stockland emerged with its strategic stake, however, Australand securities were trading at $3.87. Compared to CapitaLand’s exit price the proposed offer represents a 12.9 per cent premium and compared to the three-month volume-weighted average price of the securities in the lead-up to that sale, an 8.3 per cent premium.

While the proposed offer might still look skinny relative to those pre-event prices, Steinert doesn’t have a lot of room to manoeuvre. Stockland trades at a 5.8 per cent premium to its net tangible assets; Australand a whopping 20 per cent premium.

 He isn’t going to destroy his own security holders’ value by over-paying for Australand and the initial $15 million of synergies Stockland believes the merger would generate.

Steinert knows there is a lot of loose Australand stock floating around. CapitaLand sold down an initial 20 per cent of the group last November at $3.685 per security. It sold its remaining interest in March for an average price of $3.75 per security.

Other than Stockland’s stake (which includes a 4.2 per cent indirect interest) those securities are held by institutions which might see the quick value-uplift and the logic of putting together complementary portfolios of commercial, industrial and medium-density residential properties together as attractive.

Stockland, in grabbing its 19.9 per cent interest, made it difficult for any prospective rival to out-flank it but that holding is something of a double-edged sword given that Steinert needs to be able to reassure his own investors that Australand isn’t his GPT.

Under former chief executive Matthew Quinn, Stockland grabbed a strategic holding in GPT during the post-crisis turmoil but was unable to progress whatever its strategic game-plan might have been and ultimately exited the GPT register with heavy losses. Steinert, with a reputation for discipline, will be anxious to avoid reprising that experience.

Australand would understand that the Stockland exposure gives it leverage and its immediate dismissal of Stockland’s approach and merger terms that were conditional on due diligence (which Australand, obviously, has denied access to) wouldn’t have come as a surprise to Steinert and his advisers.

The defence team, however, would also be conscious that their own security price has been inflated by the takeover speculation; that Stockland could shift into a more hostile stance and appeal directly to their institutional shareholders and that there is a fundamental business logic to a merger with Stockland or one of its peers (Mirvac and GPT held inconclusive discussions with AustraLand and its former parent in 2012) during another period of consolidation of the A-REIT sector.

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