CIT looks even poorer, having bet on an unwinnable gamble
NOBODY looks pretty after a fight. Two Reit managers, Cambridge Industrial Trust Management (CITM) and MacArthurCook Investment Managers (MIM), have been battling for control of MacArthurCook Industrial Reit ahead of its crucial extraordinary general meeting today.
MacArthurCook Investment Managers’ plan is the worst available; it is also the only one available. The new investors had the bargaining power and they have used it well for their own benefit.
On Friday, CITM’s bid was scuppered by the Monetary Authority of Singapore – due to potential conflicts of interest – so it seems that MIM, MI-Reit’s present manager, has won. Its controversial plan to recapitalise the Reit will probably get passed today. Unitholders have no other options now that CITM is out of the picture.
Indeed, MI-Reit’s unit price fell almost 9 per cent on the news. The Reit’s price had been supported this past week by the hope that CITM had a viable alternative. That’s because the refinancing plan is heavily stacked in favour of a group of new investors. AMP Capital Holdings, present sponsor AIMS Financial Group and other ‘cornerstone’ investors, would be getting 221 million new units at 28 cents a unit. That’s 83 per cent of existing units outstanding priced at 70 per cent off net asset value, 24 per cent off Friday’s closing price, and about 32 per cent from its traded price before the announcement. A two-for-one rights issue at 15.9 cents apiece will also follow the placement.
By any measure, that’s a lot of wealth destroyed. How much exactly? If unitholders take up their rights entitlement, in return for only halving their stake they’ll be paying 31.8 cents for every unit they now hold.
In terms of distribution, they could lose one fifth of their annual yield, according to BT calculations. Not subscribing to the rights issue could cost them 75 per cent of their present annual distribution, and 80 per cent of their stakes. No wonder existing unitholders are up in arms. MIM’s chief executive Nicholas McGrath says the discounts were necessary to raise the cash it needed – $217 million from the placement and a subsequent two-for-one rights issue plus another $215 million in loans. The Reit desperately needs emergency funds to pay off $226 million in loans and $90 million to buy a property and would have to be liquidated if the plan was rejected, Mr McGrath said. It has already survived two close encounters with death.
Unitholders, pointing to its net asset value of 94 cents a unit, say that’s not such a bad thing, really. But MIM says its $490 million portfolio would not have fetched anything close to NAV in a firesale.
Is that true? Unitholders are suspicious and blame MIM’s mismanagement, grumbling that if the Reit survives, it will continue to reap management fees. We’ll never know; perhaps to support its case MIM could have hired independent consultants to estimate a break-up value.
But it is too late now. MIM’s plan is the worst available; it is also the only one available. The new investors had the bargaining power and they have used it well for their own benefit.
CIT, if anything, comes off looking even poorer. Its appearance on the scene on Monday saw a spike in MI-Reit’s unit price. Then, it was hinting at a merger – it said its analysis valued MI-Reit at about 47.9 cents, or 1.1 CIT units, comfortably above the then market price. It also released documents suggesting that a takeover offer for MI-Reit was under serious discussion. Chris Calvert, its CEO, told reporters that consolidation of the two Reits was an option. If not a merger outright, then having it as a manager of both Reits would mean cost savings, while MI-Reit could for a time live off CIT’s debt facilities. Investors bought the story.
CIT soon had to backtrack. That bit about consolidation – that was just ‘misinterpretation’. It was quickly forced to state openly that it would not launch an offer for MI-Reit.
And on Friday, no doubt under pressure from the authorities, it had to make the humiliating admission that it couldn’t take over as manager and that it otherwise had no feasible plans for the rescue of MI-Reit.
And the worst of it was, it was totally unnecessary. CIT only bought its close to 10 per cent stake the previous week, after announcement of the share placement. It could have quietly sat out the whole saga with no loss.
The fact is, CIT has now spent $10.3 million of its unitholders’ cash on a gamble we now know it could never have won (and likely thousands more on professional fees and attack advertisements).
Its own unitholders have started grumbling – that money, over a third of the $28 million raised in a recent private placement, was for asset enhancement and working capital, not a speculative venture that was at best, ill-advised. At worst? Your conspiracy theory is as good as mine.
Source: Business Times, 23 Nov 2009