ALE receives takeover offer

ALE Property has received an offer from Caledonia Investments – its largest shareholder with a 26% holding – to purchase the rest of its shares for $3.95 per share in cash.

Priced at a 9% premium to yesterday's close, amongst other things the offer is conditional on unanimous approval by the board in the absence of a better offer.

The Board has rejected the offer, however, stating that it would 'significantly undervalue' ALE and has advised shareholders to take no action at this time.

There's no guarantee that a superior offer will emerge and the concentrated nature of the share register means a hostile bid would struggle to succeed. As such, while ALE shares have risen above the bid price upon the stock commencing trading this morning, they could well fall back to around previous levels should no superior bid be forthcoming.

ALE's 86 hotels are leased on long-term, primarily triple-net leases to Australian Leisure and Hospitality (ALH), 75% owned by Woolworths.

As we explained when we first upgraded ALE to Buy in ALE Property: Down in one on 2 May 12 (Buy — $2.08), the hotels appear to be leased at below-market rents. Further, the substantial capital investment that ALH has made since then – the company is spending $8m renovating the Crows Nest Hotel, for example – has helped increase the profitability of many of the hotels.

With rents subject to a market review (capped and collared at 10%) in 2018 and then a full market rent review in 2028, ALE shareholders will benefit as leases (eventually) revert to market levels. So in attempting to value ALE, we've estimated the extent of 'under-leasing' – and factored in a substantial margin of safety.

With the bid landing at only slightly less than our $4 Sell price, and the board rejecting it, all while we edge towards the rent review dates, we're happy to reduce this margin a little and nudge up our Buy price to $3 and our Sell price to $4.30.

ALE's shares have risen 9% since ALE Property: Result 2015 (Hold — $3.68) and we continue to recommend you HOLD.

Note: Our Equity Income Portfolio owns shares in ALE Property.