LLC wins BBC

This story features LENDLEASE GROUP, and other companies. For more info SHARE ANALYSIS: LLC

By Chris Shaw

Given the tough property market at present, a move to expand and so achieve scale in what remains a growth sector in retirement villages make sense. That’s why Lend Lease’s ((LLC)) acquisition of a controlling stake in Babcock & Brown Communities ((BBC)) for $236.8 million makes strategic sense to Merrill Lynch.

The purchase sees the company acquire the management rights and lift its stake in the group to 41%, but the broker makes the point a full price has been paid given the placement at 68c represents a premium of 66% to the volume weighted average price over the past three months and is at a 19% premium to net tangible asset backing.

One plus, in the broker’s view, is that the deal is of an appropriate scale given the tough market conditions at present, while the decision to keep BBC a listed entity means Lend Lease can earn fees while keeping its balance sheet exposure to a minimum.

The other side of the coin, in the broker’s view, is the BBC assets are not of as high a quality as those of FKP ((FKP)), which is now no longer a target for Lend Lease after previous merger discussions went nowhere. As well, given its concerns over the shorter-term outlook for residential property, the broker remains cautious on the outlook  for retirement assets over the same time frame.

On the broker’s numbers the deal should, despite the high price being paid, be marginally earnings accretive in FY09, while producing the longer-term benefits of increased scale in a growth sector. ABN Amro agrees, with the broker liking the fact the company was able to retain its balance sheet capacity through the structure of the deal, which means it can look at additional opportunities going forward. This is especially so given the current difficult environment for property plays generally.

It is this difficult environment that prevents the broker from taking a more positive view on Lend Lease at present, as little or no earnings growth is expected over the next couple of years. This is evident in consensus earnings estimates, which in earnings per share terms show forecasts of 96.6c in FY09 but just 88.6c in FY10.

For ABN Amro this means even though it likes the BBC deal, the stock is still a Hold. Here it is not alone, as the FNArena database shows a total of four Buys including Merrill Lynch compared to just two Holds, with an average price target of $12.58.

Today, shares in Lend Lease are slightly higher and as at 12.00pm the stock was 10c stronger at $9.50.

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