Is Stockland Preparing To Bid For Australand?

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-Plenty of synergy in a takeover
-But why delay a full bid?
-Need to find buyer for office
 

By Eva Brocklehurst

The discharge of CapitaLand's stake in property developer Australand Property Group ((ALZ)) has brought Stockland Group ((SGP)) to the register, with the latter gaining a 19.9% strategic stake. Brokers think events might move quickly now and Stockland may make a full bid for the company.

There's plenty of synergy to be had. CLSA observes a takeover will improve Stockland's apartment, industrial and Sydney exposure. It would be 4.5-6.9% earnings accretive in FY15, but the broker considers it essential that Stockland find a buyer for Australand's $1.2bn office portfolio. Potential partners are GPT Group ((GPT)), Growthpoint ((GOZ)), Charter Hall ((CHC)) and 360 Capital ((TGP)), in the broker's opinion. CLSA expects a full bid to eventuate given Stockland, under prior management, held equity stakes that led to nothing. The one criticism CLSA levels at Stockland is that it should have acquired the full 39% CapitaLand stake and immediately launched a takeover. The question for several brokers is: Why didn't Stockland move when CapitaLand sold a 20% stake in Australand last November?

Morgan Stanley queries why Stockland didn't act four months ago, when it could have acquired CapitaLand's first 20% divestment at $3.685. Even now, given CapitaLand has sold 39.9% and Stockland took just 19.9%, the broker wonders why the company did not take a bigger slice. The broker harks back to the failures of strategic stakes in 2008, when Stockland took 12.7% of GPT and 13% of FKP Property ((FKP)), which resulted in no eventual gain. Moreover, Morgan Stanley does not think the overlapping businesses immediately combine. Australand has industrial and medium density residential assets, which are two areas where Stockland wants to expand, but Stockland cannot extract any synergies without launching a full takeover, which in turn could be expensive and value destructive in the broker's opinion. Morgan Stanley is negative about the transaction and thinks it is a risky move that will need to be clearly explained to the market. The broker retains an Overweight rating.

A while back Credit Suisse suggested that Australand may offer an opportunity for Stockland to expand in the apartment and industrial segments as the company has been committed to growing residential property holdings within urban infill locations. The time has come, as Australand would offer increased NSW and Victorian residential exposure and an increase in the medium density land bank. Credit Suisse thinks Stockland will be able to add value beyond the yield spread in both operating and strategic synergies. Australand would deliver immediate scale in apartments and industrial segments. The broker suspects Australand will retaliate to the stake by repaying its hedged debt in order to boost earnings per share. Credit Suisse has upgraded both stocks to Outperform.

The rationale, in UBS' view, lies with the industrial and business parks and the medium density residential projects. The broker thinks Stockland will act quickly, given recent strategic stakes were not successful. UBS thinks Stockland will assess a potential transaction primarily on earnings and enterprise value accretion. A full takeover could be 4.8% accretive to underlying earnings at $4.00 a share and lift Stockland's gearing to 27%, all else remaining equal. Still, UBS believes the net tangible asset (NTA) impact needs consideration. The strategic benefit of immediately accessing an attractive residential business and high quality industrial assets is marginally offset by risks associated with those assets that do not fit with the company's strategic goals, such as office and high density. UBS concurs with CLSA, in that this could be mitigated by introducing a partner early rather than warehousing the assets. A $600m sale of office assets would reduce accretion by 2% but probably be well received strategically.

Assuming equity funding, BA-Merrill Lynch thinks Stockland could pay up to $4.20 a share for an additional stake and still achieve accretion to earnings. Pricing is expected to be the main concern of any deal. Merrills thinks the market may penalise Stockland on the basis of the subdued return on capital employed. If Stockland were to pay $4.20, the implied returns of Australand's businesses reduce to 7.6% for the trust and 8.4% for development.

JP Morgan observes the initial stake was debt funded, lifting gearing to 26.7%. Stockland intends to maintain gearing below 30% so the broker assumes a full scrip offer would be made for the remainder of Australand. Based on a $4.10 implied offer price the broker estimates the transaction to be 5% accretive and dilutive of NTA by 2%, lifting gearing to 29%. This would work. JP Morgan does not think GPT, Mirvac ((MGR)), or Lend Lease ((LLC)) for that matter, would get involved. Although GPT bid for Australand in December 2012, JP Morgan notes it never wanted the residential business. Mirvac is better strategic fit, given the strong office platform and ambitions to increase industrial exposure. In this instance, Stockland has the first mover advantage.

Summing up, on the FNArena database Australand has two Buy, three Hold and one Sell (Macquarie) rating. The consensus target is $4.05, suggesting 0.3% downside to the last share price. The range of targets is $3.57 to $4.27. The dividend yield on FY14 estimates is 5.4% and on FY15 is 5.7%. Stockland has four Buy ratings and two Sell. The consensus target is $4.03, signalling 7.4% upside to the last share price. Targets range from $3.59 to $4.31. The dividend yield on both FY14 and FY15 earnings estimates is 6.4%.
 

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