Stockland settles the score

In the property sector there are some who, perhaps out of necessity and their own condition, see this as a period of historic threat. Stockland's Matthew Quinn, however, appears to see it as a moment of historic opportunity.

Almost before the ink had dried on the cheques for $300 million in Stockland's capital raising last month, Quinn had snapped up a strategic stake in retirement living group Aevum from Babcock & Brown. Within days it had grabbed a similarly strategic stake in FKP Property and gained a first-right-of-refusal over FKP's retirement living business. Now it has made a bold – but well-timed and executed – entry to the register of the reeling GPT Group.

Stockland has acquired an interest of 12.7 per cent in GPT. Most of the shares – 390 million of them – came from Perennial Investments, which was paid for with $224 million of cash and 51 million Stockland shares.

Stockland also has a $97 million equity swap facility with an investment bank covering a further 117.3 million shares.

Perennial has made no secret of its disappointment that GPT was forced into a deeply-discounted issue to save itself, which probably provided Stockland with its opportunity to snap up those shares. The equity swap was put in place after the placement was priced at 60 cents per security, which enabled Stockland to gain its exposure while GPT was trading at between 70 and 80 cents a unit.

Essentially Stockland has built a strategic position on the register of a vulnerable rival at market prices. It has done so just after GPT completed the $1.3 billion institutional component of a $1.6 billion capital raising but ahead of Monday's close of the $300 million retail offer, underwritten by Singapore's GIC Real Estate.

That issue stabilised GPT, which has been completely destabilised by the nature and timing of its ill-fated expansion into European and US real estate, largely with its joint venture partner Babcock & Brown. While highly dilutive, the raising created headroom in GPT's banking covenants that were looking quite dangerous.

Stockland has, of course, long harboured ambitions of owning GPT and its core portfolio of attractive Australian properties. It lost out, with Lend Lease, in the three-cornered contest for GPT four years ago this month – in November 2004 – that ended with GPT's disastrous decision to secure its independence by entering the joint venture with Babcock.

The decision to plunge onto the GPT register in the midst of its capital raising would suggest Quinn believes GPT's worst moment has passed. The market has discounted GPT securities to the point where it has notionally assigned no value to GPT's offshore assets and the $2 billion of capital GPT has tied up in the joint venture with Babcock in particular.

Quinn hasn't, at this stage, at least, bought himself an option on control of GPT but rather a seat at the table.

To get the capital raising away GPT invited GIC Re into its register. GIC will end up with between about 12 per cent and 18 per cent of GPT's capital, depending on the level of shortfall to the retail offering. The potential for a corporate play might reduce the level of shortfall and therefore the scale of the GIC Re security holding, although that doesn't appear to be behind the timing of the play.

The Stockland stake could be seen as either an option that would improve its position should it want to bid for GPT at some point or else provide leverage in the event of GPT carve-up.

The property world is quite small. Stockland would know GIC Re, a Singapore Government-owned fund that is one of the top 10 property investors in the globe, quite well.

In the background, as always, is Westfield, which co-owns a number of GPT centres and has pre-emptive rights over them. Quinn's move might produce a counter from Westfield.

In the present market climate, it is unlikely Quinn would have committed capital to a passive exposure so it is inevitable that he does have some gameplan in mind to eventually convert the investment in GPT securities into ownership of some or all of its underlying properties.

Having lost its CEO Nic Lyons and with a chairman Peter Joseph who has committed to departing at the next annual meeting, GPT is in no position to defend itself if Stockland were to decide to do something formal and hostile. The GPT investor base would be seething at the destruction of wealth and income their management presided over as a result of that controversial decision to choose the Babcock deal over more conventional and less-risky alternatives.

Quinn has emerged from the trauma within the A-REIT sector with his credibility largely intact. Stockland has had one of the more conservatively positioned balance sheets in the sector and was quick to maintain that when a window of opportunity to raise new equity opened last month.

The investment in GPT, given that it has been funded partly by equity and partly through an off-balance sheet exposure through the equity swap, won't have a material effect on Stockland's gearing ratios.

Stockland, if it wanted to, could position itself as the source of management and direction to fill the void at the top of GPT, using its credibility and paper as currency for a second attempt to merge with GPT. However and whenever it moves forward it now has to be dealt with, either by GPT itself or anyone else with designs on the GPT portfolio.