Key points:
- The merger between Shaftesbury and Capital and Counties is destroying value
- But who is there that could disrupt this deal?
- Capital rich and aggressive commercial property companies are scarce these days
The mergers between Capital and Counties (LON: CAPC) and Shaftesbury (LON: SHB) clearly isn't liked by anyone in the market as both share prices have fallen on the announcement of it. However, that no one seems to like it doesn't mean it won't go ahead – for it's difficult to see who might be able to break it up.
Shaftesbury shares are down 54p, or near 10%, on the announcement, which clearly means that at least some people think this significantly undervalues the company. But equally Capital and County shares are down 1.5%, so it doesn't seem that anyone thinks that company is picking up much from that undervaluation. Which is a bit of a puzzler it has to be said – if Shaftesbury is being bought on the cheap, a reasonable conclusion from that share price decline, then the other people in the deal, CapCo might be thought to be getting a bargain but that doesn't seem to be true either.
In normal circumstances, we'd expect an obviously value destroying deal like this fail simply because it is so obviously value destroying – the value of the combined companies is down some 6% or so just on the news of the combination. But it's most unlikely that anyone is going to interrupt this deal.
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Partly because CapCo already owns 25% or so of Shaftesbury, so we know how that stock is going to be voted. It's also supported by Norges Bank and Madison International, so that's some 35% of the share capital on side for the scheme.
It's possible to see the merits of course. Both companies are large West End landlords, combining them will give them more power over the area. enable larger redevelopment to be undertaken, that sort of thing. The REIT tax structure will be retained, so 90% of profits will be paid out as dividends and so on. It's entirely possible to see the business logic here.
And yet by that share price response it's clear that investors are unhappy with the idea. If investors are unhappy with management ideas, that does, often enough, lead to those plans unravelling – at least if enough investors are unhappy enough, it does. That then opens up opportunities for us to trade on subsequent price movements of course.
The difficulty here is that firstly, the managements seem to have this pretty well tied up already. They do seem to have enough of the CAPC and SHB stock already committed to make it a pretty fair bet that it will indeed go through. The other issue is that it's not obvious who might step in to derail this. It would need to be another bidder, one in much the same field, one willing to pay more in order to disrupt. But the British commercial property sector isn't exactly full of people with strong balance sheets looking to expand just now, is it? And that's putting it rather mildly.
The assumption at this stage has to be that there's no obvious alternative deal nor bidder out there, so this deal may well go through. Despite the value subtraction the share prices are telling us about.