Stockland's ambitious land grab

Stockland’s Mark Steinert’s tactics in grabbing a 19.9 per cent stake in Australand are obvious. Less clear is what his strategy might be.

Once Singapore’s CapitaLand began selling down its controlling shareholding in Australand last year – it sold 20 per cent of Australand last November to reduce its security holding to 39 per cent – it was apparent that control of the locally-listed property group would inevitably become available.

Given that late in 2012 GPT had tried but failed to convince Australand to sell it the bulk of its assets, excluding its residential property division, and that Mirvac subsequently had deep and meaningful talks with Australand and its parent that didn’t produce a deal, Steinert would have recognised that CapitaLand’s signalling of its exit could trigger another bout of strategic activity.

GPT, with its failed tilt at Commonwealth Office Property, where it was out-bid by Dexus, preserved its $3 billion of acquisition capacity after walking away from that process with a consolation prize of $1.1bn of properties for its wholesale office fund. GPT’s Michael Cameron has made it clear he wants to add to GPT’s office and industrial properties to reduce its bias towards retail.

Mirvac’s diversified portfolio matches up nicely with Australand’s collection of commercial and industrial, medium-density residential and investment properties.

By grabbing a stake just below the 20 per cent takeover threshold Steinert has put his foot on Australand and made it more difficult for any prospective rival to out-manoeuvre Stockland in a contest for influence or control.

He may also have blind-sided any prospective competitor, given that when CapitaLand sold down its holding last November its remaining securities were supposed to be escrowed for 180 days, or roughly another two months.

It would appear the institutions that bought the securities in November released CapitaLand from the escrow, perhaps in exchange for participating in the sell-down to the market of the remaining 20 per cent it held (after the sale to Stockland).

In any event, while it might be possible for a rival to match his stake, Steinert has made it more difficult and more expensive and at worst has secured Stockland a strong seat at any future table where the fate of Australand is determined.

It is, however, an expensive seat. Stockland now has $435 million tied up in Australand and has paid a price that reflects the fact that Australand trades at a premium of nearly 10 per cent to its book value. Stockland itself is trading at about a five per cent premium.

The problem for all the A-REITs looking at mergers and acquisitions of any scale is that in their search for yield investors have ensured the property vehicles are quite fully priced. Against that, there aren’t that many opportunities left in the sector to gain scale and synergies and add diversity. The exit of its major shareholder via the sharemarket put Australand into play.

Stockland won’t, one assumes, want to have $435m of capital tied up in Australand indefinitely, reprising the unsuccessful opportunism of its former chief executive, Matthew Quinn, in the post-crisis environment when he locked up a very big lump of capital in GPT. Stockland lost very heavily on the GPT exposure when it sold it in 2010.

In announcing the acquisition of the Australand stake Steinert described it as strategic and referred to Australand’s ‘’diverse and complementary’’ portfolio of assets, including its industrial and medium-density residential businesses. He said those businesses were ‘’well aligned’’ with Stockland’s.

The security holding would, ‘’over time,’’ enable Stockland to explore strategic opportunities with Australand, he said.

That might suggest that he believes he might be able to use the stake to extract some assets from Australand rather than making a bid for the entire group. Or perhaps he’s contemplating an agreed merger, although it would be hard to make the numbers work for Stockland investors.

Given that there is a cost involved in maintaining a passive investment of the scale of Stockland’s interest in Australand, it is probable that Stockland’s gameplan will become clearer sooner rather than later.