Proposed Gravest-prop merger

Posted On Wednesday, 11 July 2001 03:01 Published by eProp Commercial Property News
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A merger of Grayvest and Grayprop could result in a listed property fund with a market capitalisation of R2,2-billion, making it the JSE Securities Exchange SA's (JSE's) second-largest, following Liberty International.

James TempletonThe two groups issued a joint cautionary notice last week, saying they were investigating a potential merger.
The consequences of such a merger have triggered considerable excitement among players in the listed property sector of the JSE. Analysts see such a step as very important in the creation of bigger and better property funds on the JSE.
James Templeton, a construction and property sector analyst for Barnard Jacobs Mellet, said his firm was 'positive' about the possibility of a combined fund, mainly for reasons relating to size and liquidity.
The listed property sector is dogged by small funds of poor quality, which negatively affect liquidity and investor sentiment.
Another reason to be positive about the combined fund, said Templeton, related to the guidelines governing unit trusts.
The Association of Unit Trusts restricted unit trusts from holding an interest of greater than 5% in any company with a market capitalisation of less than R2-billion.
He said this limit was raised to a 10% interest in those companies with a market capitalisation of greater than R2bn.
'Should Grayprop merge with Grayvest, we estimate that the new fund could have a market capitalisation of about R2,2-billion. This would entitle unit trusts to raise their stake in the company from the current maximum of 5% to a maximum of 10%,' he said.
Templeton said that this increase in demand for its units would be beneficial to the newly merged company.
He said the liquidity of the merged entity should be above average and the larger fund could attract new investors to the listed property sector.
The two funds have a similar exposure, reflecting a retail bias, which means that the exposure of the combined fund will not change significantly.
However, Templeton said that this weighting, towards the retail sector, was a concern.
He said that the first potential means of calculating an exchange ratio when two funds merged was to use historic unit prices.
Using the likely three-month or one-month historic unit price ratio as the exchange ratio in this case, there would be very little potential movement from the present prices, said Templeton.
'However, using the net asset value of both funds we obtain an exchange ratio of 5,4 Grayprop (shares for every) Grayvest,' said Templeton. 'Should this be the case, there could be potential upside in Grayvest.'
As a property unit trust, however, Grayprop is not geared.
Grayvest, however, reported debt of R215-million in December, which equated to a gearing of about 34%.
'We estimate that the new funds gearing could be in the region of 11,3%,' said Templeton.
Grayprop's share price closed at 250c yesterday, losing 1c on the day, while Grayvest recorded a 2% or 25c gain to close at R12,50c a share on the same day.
In the past year, Grayprop has appreciated from 175c a unit to about 250c, which represents a 43% improvement.
Over the same period, Grayvest has moved from its listing price of R10 a unit to R12,50c - which is an appreciation of more than 20%.

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