Battle lines form at RCU

That didn’t take long, did it? Just a few weeks after the ink dried on RCU’s capital raising, Greg Woolley has lobbed in a low-ball takeover offer for the trust at $0.46 per unit.

The bidder’s statement is quite entertaining. We’re told the offer price ‘represents and internal rate of return of 61.8% with respect to those units acquired’ in the capital raising and ‘an internal rate of return of 92.3% with respect to those RCU units acquired’ through the sell down facility. In my business, ASIC doesn’t like people annualising short term returns. Rightfully so, when any miniscule short term return looks impressive annualised. It’s also Betrand Russell’s birthday today. And that has as much relevance to the bid price as your IRRs.

The one good thing about the debacle of the past year is that RCU’s is only left with three valuable assets. Woolley’s bidder’s statement correctly highlights that it’s a difficult market for selling assets. But two of RCU’s main assets are in a sweet spot. The RSA Security Campus is leased for 12 years with a guarantee from a NYSE-listed, A-rated corporate. Not surprisingly with 10-year government bond rates at 1.8%, single tenant assets with long leases and good credit are in high demand. RCU’s book value, US$99m including tenant improvements, is very realistic.

Then there are the GSA assets, a portfolio of US-government leased assets with a weighted average lease expiry of more than 7 years, on the books at an average capitalisation rate of 8%. Again, buying Government leased assets yielding 8%, when the government bond rate is 6% lower than that, seems a pretty attractive deal to me.

RCU’s 35% share of the joint venture is on the books at $US38m. If they owned the assets outright, they’d get book value. Government Properties (NSYE:GOV) owns a portfolio of very similar assets and trades at 1.2 times NTA. Let’s knock of $5m for the joint venture discount and call it $US33m.

RCU’s net debt is $US75m, so the sale of these two assets alone at anything like current book value would enable the trust to return untiholders $US57m, or US$0.56 per unit. The way things are going, that could be worth more in Aussie dollars.

We would be left with the FedEx Terminal (book value $US22.5m) and the Pfingsten Rd asset (book value $US16.7m). Granted, these aren’t going to be easy to sell. But debt-free and with US$0.56 in our pockets, we could afford to be a little more patient. And a 20% hair cut would still return us an additional $0.30.

So what’s Woolley playing at here? He knows we know the value of the assets and aren’t going to sell at $0.46. After yesterday’s trading, where bidders were well in excess of the $0.46 bid price, he knows everyone else knows that as well.

But this will just be a first shot. They hadn’t even bothered to fill in the dates in the bidder’s statement. Woolley will look for the weakest point in the line of unitholders. At some point, there won’t be enough in it for the arbitrageurs to climb over the top of his bid and there will be enough unitholders prepared to sell such that the rest of us will be scared into submission. The section in the bidder’s statement about his negotiations over the management rights seemed strategically placed to add to our fears.

If he can get to anything over 40%, the risk for everyone else in not accepting the offer becomes unbearable.

It’s a smart strategy but I’m guessing most of those left on the RCU register, after two capital raisings and a year of disasters, are fairly sophisticated and know the value of what they own. I don’t think anyone is expecting full value. But, one way or another, we’re going to do a lot better than this low-ball bid.

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