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Octopus turns out a damp squib

Posted On Thursday, 06 December 2007 02:00 Published by eProp Commercial Property News
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Merger and takeover activity in South Africa's listed property market is expected to hot up considerably over the next few months as dominant players vie more aggressively than ever for a slice of the JSE's R105bn real estate sector

Craig HutchisonAnd it's not unlikely that by end-2008 property investors will have a handful of funds with market caps exceeding R10bn to choose from. Currently, it's only Growthpoint (R18bn) that qualifies on that front. Stanlib property analyst Evan Jankelowitz says he wouldn't be surprised if two or three property funds make it into the JSE's Top 40 within the next 12 months, given how the sector's consolidation drive is accelerating. Not a single property fund has ever been included in the Top 40 index.

So what's on the cards for next year? One of the biggest transactions of 2008 could be a tie-up in some form or another between Hyprop, Sycom and Fountainhead (ex-Grayprop). Veteran dealmaker Marc Wainer, who manages Hyprop through Madison Property Fund Managers, told Finweek (22 November) that Madison's dream is to create one mega, retail-focused fund by merging the three counters.

There's also renewed talk of Madison merging two other property funds under its management: ApexHi and Redefine. If Madison can pull off those deals, the new listed entities could rival Growthpoint in terms of size.

But a more likely merger is one between industrial-focused loan stock company Pangbourne and (all or some of) its associated funds: Siyathenga, iFour and Monyetla. A consolidation of the various portfolios could position the group as one of the sector's five biggest counters, with a combined market cap close to R10bn.

That follows the recent reshuffling of Pangbourne's board, initiated by the Resilient Group. In a surprise move in September, Resilient and sister company Diversified upped its stake in Pangbourne from 3% to 13%. It was agreed soon after to replace at least five of Pangbourne's existing directors by people nominated by Resilient.

The new directors include Des de Beer (MD of Resilient), Barry Stuhler (former MD of Capital) and Jacques van Wyk (former financial director of Resilient). Changes to the Siyathenga and iFour boards were also announced last week.

Pangbourne CEO Craig Hutchison confirms the group's multi-fund approach - the so-called octopus strategy - will be "re-looked" at. De Beer didn't want to be drawn on what the immediate strategic plans for Pangbourne were, except to say an announcement was likely before year-end.

But market speculation is that at least two of the three funds - most probably Siyathenga and iFour - will be merged into Pangbourne. Some expect the smallest of Pangbourne's associated listings (office fund Monyetla) to be sold off so management can focus on unlocking value in the group's industrial and retail portfolios.

The Pangbourne stable has underperformed the listed property sector in recent years, both in terms of share price and distribution growth - clearly indicating that the market never took to its octopus strategy. The general view is that investors don't like the additional admin costs that come with running four separate entities. Concerns have also been raised about insufficient disclosure.

Most property analysts favour a consolidation of the Pangbourne stable of funds. Jankelowitz believes a "cleaner" structure and revenue stream should lead to a re-rating of the stock. He says Pangbourne is undervalued despite the share price already drumming up around 10% over the past two months following the Resilient buy-in. Jankelowitz says other reasons to buy Pangbourne include the appearance of a fair amount of fat in the portfolio - opportunities that a fresh look from a newly motivated board could capitalise on.

Catalyst Fund Managers' property analyst Paul Duncan holds a similar view. Duncan says Pangbourne's industrial portfolio has potential for significant upward rental reversions, as current levels are way below market.

The fund has a R2bn development pipeline that would also boost the quality of the portfolio and income stream over the next two to three years. Duncan says there's no doubt that Pangbourne's new management team has the ability to improve the fund's earnings, particularly if a merger is accompanied by offloading poorer quality stock.

Although not everyone is in favour of smaller niche funds being swallowed by big conglomerates, further consolidation is bound to create short-term share price upside for property punters. A number of real estate stocks have in recent months already rallied on the back of M&A activity or rumours thereof. Expect more of the same over the next few months.


Last modified on Tuesday, 22 April 2014 16:17

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