The rewards of a pragmatic GPT-Dexus truce

If it plays out as planned, the agreement between GPT and the Dexus-CPPIB consortium for CPA should see both parties walk away satisfied, and would allow GPT to still pursue any opportunities that emerge within the sector.

Having put in place a rather attractive consolation prize, what will GPT Group’s Michael Cameron do next?

On Monday evening, GPT and its rival bidder for Commonwealth Office Property, the Dexus/Canada Pension Plan Investment Board grouping, announced they had entered binding memoranda of understandings over the potential sale of five assets by Dexus and CPPIB to the GPT Wholesale Office Fund should the Dexus-led bid for CPA succeed.

Should all the asset sales proceed, GWOF would outlay almost $1.2 billion to buy the properties.

The deal doesn’t preclude GPT continuing with its own bid for CPA, nor increasing it. GPT gate-crashed the original $2.8 billion Dexus/CPPIB bid for CPA in November with a $3 billion offer of its own, forcing the partnership to respond by slightly increasing its offer and altering the terms to inject more cash and reduce the scrip component.

GPT, with an 11.44 per cent interest in CPA, could have – and could still – counter that move with an increased offer of its own. With the Dexus/CPPIB valuation of CPA already regarded as very full and any increase in GPT’s bid probably requiring more cash, however, there would be a significant risk of GPT over-paying.

That risk would be compounded by the fact that GPT’s securities are trading at a material discount to their asset backing. It would make little sense to significantly dilute its own security holders in order to pay an over-the-top price including a takeover premium for CPA.

While much has been made of the need for Cameron to pull off a successful transaction after trying unsuccessfully to land a couple of deals last year, GPT’s brush with disaster last decade – its big, highly-leveraged and ill-fated joint venture with Babcock & Brown – is scorched into its corporate memory.

Cameron, brought in to clean up that mess and restore the group to its former blue-chip status, isn’t likely to be keen on relinquishing the group’s restored reputation for financial discipline. The most likely outcome is that he’ll take an attractive second prize and allow Dexus and CPPIB to acquire CPA.

It wouldn’t be a bad outcome for GPT. Under its existing bid it would outlay about $4 billion in cash and shares to fund the bid for CPA, including GWOF’s borrowings to acquire $1.1 billion of properties from it if the bid succeeded.

If it departs the CPA scene GWOF would still acquire a similar amount of assets, increasing GPT’s funds under management without impacting GPT’s own balance sheet or the $3 billion of firepower it was prepared to devote to CPA. With one of its major rivals for office properties on the sidelines until Dexus has digested CPA, it would still be able to pursue any opportunities that emerge within a sector that is being re-shaped.

Cameron’s strategy is based on total returns and includes an objective of lifting GPT’s funds under management from about $7.2 billion to $17 billion over the next few years. The GWOF transactions, if all were completed, would add significantly to the surge of organic growth already occurring as GPT seeks to lift the “active” component of its earnings to about 10 per cent and leverage its returns on equity.

It wouldn’t be the big prize, but it wouldn’t be a bad outcome.

For Dexus and CPPIB, the deal may not completely remove GPT from the scene but it makes its departure far more likely and, should they achieve the 90 per cent ownership level at which the deals with GWOF come alive, reduce their own funding requirements. Four of the assets are currently owned by CPA and one – 50 per cent of the Northland retail centre in Victoria – by CPPIB.

The apparent truce between the bidders would, if it plays out as expected, represent a very sensible and pragmatic compromise in circumstances – contested bid situations – where common sense doesn’t necessarily usually prevail.

The “winner-takes-all” approach that normally prevails generally creates two losers – a “successful” bidder that pays more than it should have and the ‘”loser” who misses out entirely.

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