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Do foreign investors know something we don’t?

Since the Brexit vote last June we have seen a number of assets snapped up by foreign investors, driven in part by the weakness of sterling since the referendum. In the past few weeks Cannon Place was acquired by Deka for £485m, although admittedly it was sold by Hines. According to Cluttons the proportion of international investment in the London office sector reached 80% in the 1Q of this year, up from 59% last year. Indeed, it seems investment in the 1Q may have been at record breaking levels.

However, what we hadn’t seen until recently was acquisitions of listed property companies. It is true that Shaftesbury has been in play for a while, as Samuel Tak Lee has built up an 18% stake in the company. But last week we saw takeovers of two UK listed property companies launched on the same day (if we ignore the fact that the Market Tech deal slipped out on the previous Friday evening).

KW offer for KWE feels like a missed opportunity

Starting with the bigger of the two, KW Holdings launched a recommended offer for Kennedy Wilson Europe, which it already managed and had a c.24% stake in. It is being structured as a merger, but KWE shareholders will only have a 36% stake in the NYSE listed parent at the end of the process. The most interesting part of the deal for me was that even after offering £1.5bn, a 20% premium to the prevailing share price, the offer for KWE was still pitched at a 3.4% discount to the last reported NAV. KWE shareholders will receive two dividends which will narrow this discount, but they would have received those anyway.

This strikes me as a failure for the UK market. The KWE IPO was only 3 years ago and it raised £1bn to invest in European real estate and real estate loans. I have to admit I found it less interesting because of its credit focus, but the returns were good to start with (18% NAV total return in 2015). They slowed last year to less than 8% and it has traded at a wide discount, in line with the larger listed REITs, as the market waned.

Clearly KW has broader corporate reasons for acquiring KWE. It wants to build a global portfolio, with a wider market presence and access to capital and acquisition opportunities. Not to mention the potential synergies and earnings enhancement. So perhaps it is worth more to KW than to other investors. However, you could argue that KWE as a listed entity is a victim of the market’s short termism, trading at a wide discount, because of a perceived turn in the market cycle. Mind you, some of those investors are going to have decide what to do with the NYSE listed stock they will end up with, so perhaps that will cure them of that particular affliction.

The KWE takeover may not run smoothly however. This week the CIO of the Soros family office wrote to the KWE board expressing her disappointment at the process and the structure of the offer. If the KWE board meets the Soros demand for an open process and a strategic review, there is likely to be a delay in the process at the very least. It also looks possible that a revised offer may be required to secure the takeover, even if a third party does not come forward with a bid. If the board were to decide on an orderly disposal process, which is the other option proposed, that would delay it even further but could be beneficial to shareholders in the long run.

Market Tech to be bought by parent

There are no such doubts about the offer for Market Tech (MKT), which was trading at an 11% discount prior to the offer from the controlling shareholder’s vehicle Labtech. The offer at 188p per share values the company at £892m and saw the shares shoot up 28% on the day, to just below the offer price. Clearly with a controlling shareholder in place there is less likelihood of a counter offer or even any shareholder unrest. Especially as this offer is pitched at a premium to NAV and 30% above the prevailing share price before the offer. On top of that the Market Tech shareholders will receive cash and the offer was recommended by the MKT directors.

What is also clear is that the market never really understood what the company was trying to do. Partly this was the unproven claims of a symbiosis between the Camden market estate and the technology company that was meant to track shoppers and their spending habits. But it was also because of the short-term nature of the lease contracts at Camden and the lack of clarity over the company’s strategy for combining the market with commercial and residential development.

So in this case I would suggest it was more of a management issue than a market failure. If you bring an unconventional product to market, especially in a conglomerate form and with a dominant shareholder on the register, it is incumbent on you to convince the market that your structure and strategy make sense. Therefore, Market Tech appears to be less of a victim of the whole Brexit fallout than others in the sector. Although clearly the weaker sterling will have made the shares cheaper for a foreign investor.

So, in the world of property M&A it certainly looks like a trend has started. However, executing takeovers is not always as straightforward as it might appear.