St. Modwen Properties - Offer by Brighton Bidco Limited
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RECOMMENDED CASH ACQUISITION of St. Modwen Properties PLC
Brighton Bidco Limited
(a newly formed company indirectly owned by
investment funds advised by Blackstone)
to be effected by means of a Scheme of Arrangement
under Part 26 of the Companies Act 2006
- the directors of Brighton Bidco Limited ("Bidco") and the directors of St. Modwen Properties PLC ("St. Modwen") are pleased to announce that they have reached agreement on the terms and conditions of a recommended all cash offer by Bidco for the entire issued, and to be issued, ordinary share capital of St. Modwen. It is intended that the Acquisition will be implemented by way of a scheme of arrangement.
- Under the terms of the Acquisition, each St. Modwen Shareholder will be entitled to receive:
For each St. Modwen Share: 542 pence in cash
- The Acquisition price per St. Modwen Share represents a premium of approximately:
- 21.1 per cent. to the Closing Price of 448 pence on 6 May 2021 (being the last Business Day before the commencement of the offer period);
- 33.7 per cent. to the volume-weighted average St. Modwen share price of 405 pence over the 90-day period ending on 6 May 2021 (being the last Business Day before the commencement of the offer period);
- 37.2 per cent. to the volume-weighted average St. Modwen share price of 395 pence over the 180-day period ending on 6 May 2021 (being the last Business Day before the commencement of the offer period); and
- 23.8 per cent. to St. Modwen's reported 2020 EPRA Net Tangible Assets Per Share of 438 pence.
- The Acquisition values St. Modwen's entire issued, and to be issued, ordinary share capital at approximately £1,237 million.
- If, on or after the date of this announcement and before the Effective Date, any dividend and/or other distribution and/or other return of capital is declared, made or paid or becomes payable in respect of the St. Modwen Shares, Bidco reserves the right to reduce the consideration payable under the terms of the Acquisition for the St. Modwen Shares by an amount up to the amount of such dividend and/or distribution and/or return of capital, in which case any reference in this announcement to the consideration payable under the terms of the Acquisition will be deemed to be a reference to the consideration as so reduced. Any exercise by Bidco of its rights referred to in this paragraph shall be the subject of an announcement and, for the avoidance of doubt, shall not be regarded as constituting any revision or variation of the terms of the Scheme or the Acquisition. In such circumstances, St. Modwen Shareholders would be entitled to retain any such dividend, distribution and/or other return of capital declared, made or paid.
- The Scheme Document will contain a valuation in respect of St. Modwen's property portfolio as at 31 May 2021 in accordance with Rule 29 of the Takeover Code.
- The St. Modwen Directors, who have been so advised by Lazard, J.P. Morgan Cazenove and Numis as to the financial terms of the Acquisition, consider the terms of the Acquisition to be fair and reasonable. In providing their financial advice, Lazard, J.P. Morgan Cazenove and Numis have taken into account the commercial assessments of the St. Modwen Directors. Lazard and Numis are each providing independent financial advice to the St. Modwen Directors for the purposes of Rule 3 of the Takeover Code.
- Accordingly, the St. Modwen Directors confirm they intend to recommend unanimously that the St. Modwen Shareholders vote in favour of the Scheme at the Court Meeting and the Resolutions to be proposed at the General Meeting, as they have irrevocably undertaken to do in respect of their own beneficial holdings which are under their control of, in aggregate, 3,042,309 St. Modwen Shares representing approximately 1.37 per cent. of the issued ordinary share capital of St. Modwen on 19 May 2021 (being the last Business Day before the date of this announcement). Further details of these undertakings, including the circumstances in which they cease to be binding, are set out in Appendix 3 to this announcement.
Background to and reasons for Recommendation
- Over the last four years, St. Modwen has reshaped its business to focus on two sectors with long-term structural growth trends, logistics and housebuilding. Apart from in 2020, which was impacted by Covid-19, St. Modwen has delivered underlying total accounting returns of between 6.0% and 6.3% during this period, at the same time as reducing leverage and recycling capital from legacy assets into its development pipeline. Today, St. Modwen has high quality, scalable platforms and substantial pipelines in both logistics and housebuilding, supported by its strategic land and regeneration capability.
- The Board believes that St. Modwen's high quality product, pipeline, development expertise and strong capital base provide a foundation for continued growth, with a targeted improvement in total accounting return to c.9-10% in the medium term, assuming current market conditions persist. Since the start of this year, overall operational performance has been in line with the Board's expectations. The Board remains confident in St. Modwen's strategy and continues to believe that St. Modwen is well positioned to succeed as an independent business but has concluded that the Acquisition presents shareholders with a significant acceleration of this value creation.
St. Modwen Logistics
- St. Modwen Logistics consists of a growing and resilient income-producing portfolio focused on modern urban and big box warehouses and a landbank with the potential to deliver c.19m sq ft of new logistics space at an average yield on cost of c.7-8%, of which c.7.6m sq ft (representing 40% of the pipeline by space as at 30 November 2020) is committed or consented. The Company is on track to deliver 1.5m sq ft of new developments during 2021, of which 10% is pre-let, with a further 16% under offer, on average 1.6% ahead of expected ERV. 2020 completions are currently 91% let or under offer, up from 81% since February 2021.
- The Board has taken into account the pace of capital growth in the industrial property market, as evidenced by recent MSCI data (+7.2% for the UK excluding the South East in the five-month period between November and April), which it expects to be reflected in the next portfolio revaluation as at 31 May 2021, and the potential for further yield compression. In assessing the value creation opportunity within its landbank, and the timing thereof, the Board recognises that c.60% (c.12m sq ft) of the landbank does not currently have planning consent; specifically, c.30% of the planned development in FY23 remains subject to planning consent, rising to c.85% in FY25.
- Delivery of this development potential will require significant additional capital, an acceleration in the pace of delivery from 1.2m sq ft in 2020 to up to c.2m sq ft per year from 2022, and further growth in occupier demand in the Midlands and West of England where St. Modwen's land holdings are concentrated. Based on a recently completed independent external valuation, the Board believes the book value of the land options in the c.12m sq ft controlled pipeline (which was c.£11m as at 30 November 2020) to be an accurate reflection of their current market value.
St. Modwen Homes
- St. Modwen Homes ("SMH") was established in 2012 and has since grown to delivering 1,060 units in 2019 and 948 units in 2020 (despite c.9-10 weeks of lost production due to the national lockdown in the spring) with a high quality, affordable family product and 5,900 plot pipeline in attractive regions.
- Despite SMH's strong growth, the business remains smaller in scale than the majority of its listed peers which is reflected in SMH's lower operating and financial metrics. The Company is on track to increase completions by c.25% and operating margin to c.14.5% in 2021, supported by recent positive trends in house prices. With an average sales rate of 0.86 over the last 12 weeks, the Company expects to complete c.450 units during the half year ending on 31 May 2021 (vs. 411 in H1 2019 and 280 in H1 2020).
- The Company intends to grow completions to c.1,500 units by 2023 as the pipeline is built out and has also outlined its plan to increase operating margins to c.16-17% by 2023. This margin improvement is expected to be driven by an improvement in the gross margin embedded within the existing landbank of 19.5%, identified operational efficiencies, and assumed additional land acquisitions with a target gross margin of at least 22% to deliver c.19% of the targeted completions in 2023.
- Whilst the Board remains confident of the scope for improving both the SMH operating margin and ROCE (which was 11.4% in 2019 and 7.7% in 2020) over time, it recognises the extended period of time required to deliver these improvements, as well as the inherent cyclicality in the housebuilding market.
Strategic Land & Regeneration
- Strategic Land & Regeneration ("SL&R") consists of a mixture of residential land, long-term regeneration sites and non-core retail and other assets. The Company's strong land repositioning capability enables the long-term value creation in its logistics and housebuilding businesses, but the existing SL&R portfolio also includes several assets which do not support these sectors, or which, due to their size or other characteristics, are too long-dated and do not meet St. Modwen's return requirements.
- Since 2017, the SL&R portfolio has reduced in size from £1.2bn to £332m (as at 30 November 2020), due to a combination of disposals and, in 2020, £121m of write-downs on residential land and retail assets. The Company plans to sell £180-200m of SL&R assets by 2023 (of which £33m has already been sold or contracted for sale). The disposal programme includes a number of large assets with unique characteristics and others which require considerable investment in order to sell, and of the £332m portfolio, c.£100m is expected to be disposed beyond 2023.
- The proposed acquisition of St. Modwen by Bidco follows the receipt of multiple proposals from Blackstone negotiated over an approximately 10 week period since St Modwen's preliminary results announcement in February 2021 at which St. Modwen set out its strategy for the business. The Board believes that the Acquisition is in the best interests of St. Modwen shareholders by significantly accelerating the value that could be realised by St. Modwen independently. In reaching its conclusion, the Board has considered the following in particular:
- the risk-adjusted returns that may be generated by St. Modwen's strategy as compared with the certainty of execution of the Acquisition, which represents an acceleration of expected value creation;
- that the offer price of 542 pence per St. Modwen share represents a premium of 23.8% to EPRA Net Tangible Assets Per Share of 438 pence as at 30 November 2020;
- that the offer price of 542 pence per St. Modwen share represents premia of 21.1% to the unaffected share price of 448 pence as at 6 May 2021, 37.2% to the volume weighted average share price of 395 pence over the 180-day period ending on 6 May 2021, and 39.0% to the share price of 390 pence as at 22 February 2021 prior to Blackstone's first proposal;
- that the offer price of 542 pence per St. Modwen share exceeds the highest share price of 530 pence since the global financial crisis;
- that the Acquisition provides St. Modwen shareholders with the opportunity to realise the entirety of their interests in cash; and
- the impact of the Acquisition on all of St. Modwen's stakeholders, including the importance of St. Modwen's employees to Blackstone's future strategy.
Background to and reasons for the Acquisition
- Blackstone is a global leader in real estate investing with $196 billion of investor capital under management dedicated to real estate. The Blackstone Real Estate group is highly active in both the logistics and residential segments. Blackstone's pan-European logistics real estate platform, Mileway, is a leading urban logistics real estate business in Europe and the UK where it owns a 48m square foot urban logistics portfolio. In the UK residential sector, Blackstone's Sage Housing platform is a registered provider of affordable housing, working with the largest homebuilders to deliver new housing for shared ownership and low-cost rental homes. Over the past three years, Sage Housing has delivered over 3,000 homes, with a pipeline of more than 14,000 under contract.
- Bidco believes that while St. Modwen's core logistics and residential business divisions each operate in attractive markets, realising the full potential of each division will require significant incremental scale and equity capital, which Bidco believes it is in a better position to provide to each business as a private company than St. Modwen can as a public company.
- St. Modwen Logistics would be a complementary addition to Mileway's existing portfolio and development activities. Bidco believes St. Modwen Logistics would be further enhanced by being part of Mileway's broader pan-European platform. St. Modwen Logistics will require significant incremental capital to realise its full potential.
- In order to maximise St. Modwen Homes' full potential and achieve management's objective of accelerating growth and operational efficiencies through scale, Bidco believes that St. Modwen Homes would benefit from the incremental growth and capital investment opportunities that private ownership can bring.
Timetable and conditions
- It is intended that the Acquisition will be implemented by way of a court?sanctioned scheme of arrangement under Part 26 of the 2006 Act (although Bidco reserves the right to effect the Acquisition by way of an Offer, subject to the consent of the Panel and the terms of the Cooperation Agreement).
- The Conditions to the Acquisition are set out in full in Appendix 1 to this announcement along with certain other terms; the full terms and conditions will be provided in the Scheme Document. The Conditions include the anti-trust Condition set out in paragraph 3(a) of Appendix 1 to this announcement. This Condition is expected to be satisfied in time to allow for the Scheme to become effective during July 2021.
- It is expected that the Scheme Document, containing further information about the Acquisition and notices of the Court Meeting and St. Modwen General Meeting, together with the associated forms of proxy, will be posted to St. Modwen Shareholders within 28 days of this announcement (or such later time as St. Modwen, Bidco and the Panel agree) and the Meetings are expected to be held shortly thereafter. The Acquisition is currently expected to complete during July 2021. An expected timetable of key events relating to the Acquisition will be provided in the Scheme Document. An updated valuation in respect of land options in St. Modwen's controlled pipeline will be made available on St. Modwen's and Bidco's websites at www.stmodwen.co.uk/investors and www.publishdocuments.co.uk by the time the Scheme Document is published.
- In addition to the irrevocable undertakings referred to above received from the St. Modwen Directors, B idco has also received irrevocable undertakings to vote in favour of the resolutions relating to the Acquisition at the Meetings (or in the event that the Acquisition is implemented by an Offer, to accept such Offer) from members of the Clarke family in respect of 11,621,472 St. Modwen Shares, representing approximately 5.22 per cent. of the issued ordinary share capital of St. Modwen on 19 May 2021 (being the last Business Day prior to the date of this announcement).
- In total, therefore, Bidco has procured irrevocable undertakings to vote in favour of the resolutions relating to the Acquisition at the Meetings (or in the event that the Acquisition is implemented by an Offer, to accept such Offer), including those from the St. Modwen Directors who own St. Modwen Shares, in respect of, in aggregate, 14,663,781 St. Modwen Shares, representing approximately 6.59 per cent. of issued ordinary share capital of St. Modwen on 19 May 2021 (being the Business Day prior to this announcement). Further details of these irrevocable undertakings, including the circumstances in which they cease to be binding, are set out in Appendix 3 to this announcement.
Information on Bidco and Blackstone
- Bidco is a limited company registered in Jersey and incorporated on 24 March 2021. Bidco was formed for the purposes of the Acquisition and is an entity owned indirectly by investment funds advised by Blackstone and has not traded since its date of incorporation, nor has it entered into any obligations other than in connection with the Acquisition.
- Blackstone is one of the world's leading investment firms. It seeks to create positive economic impact and long-term value for its investors, the companies it invests in, and the communities in which it works. Blackstone does this by using extraordinary people and flexible capital to help companies solve problems. Its $649 billion in assets under management include investment vehicles focused on private equity, real estate, public debt and equity, life sciences, growth equity, opportunistic, non-investment grade credit, real assets and secondary funds, all on a global basis.
- Blackstone Real Estate is a global leader in real estate investing. Blackstone's real estate business?was founded in 1991 and has $196?billion of investor capital under management. Blackstone is one of the largest property owners in the world, owning and operating assets across every major geography and sector, including logistics, multifamily and single family housing, office, hospitality and retail.
- Further information is available at www.Blackstone.com.
Information relating to St. Modwen
- St. Modwen is a UK-based real estate developer and investor and a constituent of the FTSE 250. Established in 1966 and headquartered in Longbridge, Birmingham, St. Modwen operates across three specialist divisions: St. Modwen Logistics, St. Modwen Homes and Strategic Land & Regeneration. The Company is active across England and South Wales with a portfolio totalling £1.37bn as at 30 November 2020.
- St. Modwen Logistics (49% of the portfolio by value as at 30 November 2020) designs, builds, owns and manages industrial and logistics assets in the UK. As one of the UK's most active developers of speculative and built-to-suit logistics buildings, St. Modwen Logistics' commercial development activity is focused on sites concentrated around major infrastructure and conurbations. Customers include some of the world's biggest logistics and e-commerce organisations as well as significant national and regional enterprises.
- St. Modwen Homes (27% of the portfolio by value as at 30 November 2020) delivers high quality family housing primarily to first time buyers in attractive regional markets across the UK. SMH currently delivers around 1,000 units per annum with an affordable private average selling price of c.£277,000, and in 2020 achieved a 96% HBF customer satisfaction score, which is the second highest among large housebuilders, and a net promoter score of 74, ranking consistently above the wider sector.
- Strategic Land & Regeneration (24% of the portfolio by value as at 30 November 2020) focuses on the promotion and master development of land, primarily for residential and logistics uses, as well as delivering transformational regeneration projects. The division is delivering development land to St. Modwen Homes, St. Modwen Logistics, and third-party housebuilders and has over 20,000 strategic residential plots in the pipeline. The majority of the division's existing portfolio is earmarked to be sold, as it is no longer core to St. Modwen's strategy.
· Commenting on the Acquisition, Danuta Gray, the Chair of St. Modwen, said:
"Over the last four years, St. Modwen has successfully reshaped its business to focus on logistics and housebuilding. Whilst both sectors benefit from long term structural growth trends, St. Modwen's financial position is strong and there is a solid strategy in place, the quantum and timing of generating shareholder value is naturally subject to execution risk.
The Board has therefore been able to evaluate today's recommendation from a position of strength. Mindful of the pace of capital growth in the UK logistics market in particular and the future growth potential in our logistics and housebuilding businesses, initial approaches were rejected. However, following careful consideration we believe this offer is in the best interests of St. Modwen shareholders and significantly accelerates the value that could be realised by St. Modwen if it were to remain independent. Additionally, the Board is reassured by Blackstone's views and approach to investing in the business and supporting our people."
· Commenting on the Acquisition, James Seppala, Head of Blackstone Real Estate Europe, said:
"Our strong conviction in the UK, together with St. Modwen's high-quality asset base, its team, and its operational capabilities, give us confidence we can further build on the company's successes. We look forward to working with the talented team at St. Modwen in the years ahead."