A proposed three-way merger between property companies Delta, Rebosis, and Ascension has fallen through, and it looks more and more like what’s going to happen is that Rebosis is going to go all out for 100% of Ascension instead. Rebosis had already acquired a healthy stake in Ascension earlier this year, and following the collapse of the three-way merger talks, it has bought up all the units that Delta had acquired in its bid for Ascension. The net result is that Rebosis now holds 32% of Ascension, with plans to buy the rest. The big question, then, is whether other shareholders agree that the deal would unlock value. Mergers and acquisitions are notorious for failing to create real value, and so shareholders will be carefully weighing their options as Rebosis continues to sniff around the unacquired portion of Ascension. – FD
GUGULETHU MFUPHI: Moving on to the proposed tripartite merger of Delta, Rebosis, and Ascension Properties: that’s been called off. Paul Duncan from Catalyst Fund Managers joins us now from Cape Town for a little bit more. Paul, your assessment of this triple merger that could have taken place: does this just prove that maybe two is generally company and three’s a bit of a crowd?
PAUL DUNCAN: I’m sorry. Can you just repeat the question there? I didn’t hear it.
GUGULETHU MFUPHI: Paul, does this mean that your assessment of the deal…does it show that cohesiveness between two parties is better than being crowded by three?
PAUL DUNCAN: Yes, the management communication to date implies that it was an amicable agreement. They couldn’t come to terms and they decided that it was in the best interests of all parties to split. I guess we’ll never know the full truth. We were never necessarily in favour of a tripartite merger from the beginning. Being a specialist property manager, we always prefer focus and smaller, sharpshooter-type funds. We felt that the merger may lose that, whereas the three parties felt that in bringing themselves together they’d create this mega-fund, which would have liquidity benefits and [inaudible 1:21] benefits, which they’ve obviously – subsequently – they believe they’re unable to achieve that.
ALEC HOGG: Paul, when we spoke yesterday to Sisa Ngebulana from Rebosis, he said that they were very excited about the fact that they would be buying the shares in Ascension. It will give them a big slug of that company now. The price they’re paying seems to be pretty ‘toppy’ when you look at the long-term share graph of Ascension’s share price. Do you think that they might be overpaying here?
PAUL DUNCAN: To be honest with you, the price that they paid at R2.61 (I think it was) on the B-units…it was trading closer to that level pre-the whole announcement of the deal. If you recall, the share price obviously went X in about April/May, so that would have also had an effect if you were looking at the extra distribution. I think that what they’re paying is reasonably fair for the assets they’re acquiring. The Ascension portfolio is not a better quality portfolio than the Rebosis assets, but there is a lot of fat and potential to unlock value there. The assets were acquired with a lot of vacancy and a lot of opportunity. Rebosis’ management team backed themselves to extract that, whether that’s necessarily fully reflective of the current price – I think they have the opportunity to do that. I think the A-units have consistently traded around those levels for a fairly substantial period of time.
ALEC HOGG: The point about this is that when you get involved as an executive in a potential takeover and in those kinds of deals, there are other influences that come into play – not always logic. My question to you is do you think they’ve done a good deal and, if you think it’s a good deal, are you increasing your stake in Rebosis?
PAUL DUNCAN: Yes, I think you’ve hit the nail on the head there with regards to other interests. Clearly, we are very nervous and conservative when it comes to acquiring companies where there may be a misalignment between the management company level and the underlying listed entity, which is obviously, where we would potentially have shareholding. We believe that Rebosis never wanted to do a tripartite deal with Delta. That was obviously as a consequence of what transpired when Delta ended up agreeing to terms with the previous Ascension MANCO; so did Rebosis and whether you believe it or not, they claim that neither party knew that the other sides were in negotiations. I think that where they are now is where they initially wanted to be – the tripartite Delta merger they were pushed into – so I think they’re back to their original first prize, which is obviously better for Rebosis and the tripartite merge.
Our required rate return does take into account a risk premium for the external management company of Rebosis, so we adjust the demand that we require to compensate us for that external MANCO risk. Management does have a stake in Rebosis – directly – so there is an argument that they won’t be destroying their own value in that particular shareholding at the expense of shareholders, to improve the value of the MANCO itself. At these levels, on a risk-adjusted basis, we don’t see significant upside to the Rebosis share price, so it’s unlikely we will be accumulating off these levels.
ALEC HOGG: Paul, we have a clip that we’d like you to watch with us and to provide your comment. It’s coming up right now.
SISA NGEBULANA: We always had the intention to proceed with a scheme of arrangement so that Ascension can be incorporated into the business of Rebosis. That will create something north of R10bn in terms of assets and something around R6.5bn in terms of market cap, so it still is our intention. At the moment, we’re happy with the status quo. We will now effectively own about 32 percent of that business. We run that business. We manage that business. It’s a very good business.
ALEC HOGG: So Paul, the point there is that Sisa wants 100 percent.
PAUL DUNCAN: I’m sorry. I couldn’t hear everything.
ALEC HOGG: That’s why I’m saying that the point is Sisa wants 100 percent. They currently have round about 30 percent of Ascension, but he wants 100 percent and he’s telegraphed that strategy. Is that something you’d support?
PAUL DUNCAN: It makes sense. I think at the end of the day the reality is… The fact that they have shares in both Ascension and they own the MANCO: the interests are aligned. If they purely owned the MANCO as a selfish shareholder in Rebosis, I would be telling them to bulk up their Ascension Fund as large as they can because you’ll be getting a fantastic return on your investment. However, now you sit in both camps, so you need to protect both the return on investment for the owners of the MANCO and the return on investment for shareholders in Ascension. The fact that they now hold 30 percent in Ascension – and the strategies are quite similar – they would end up competing, particularly in the government-tenanted, sovereign-type, internal core CBD offices. In all probability, they would bump heads against how they distinguish between which assets go to which fund.
Inevitably, it does make some sense. Obviously, there are some economies of scale that will come through the absorption of the Ascension Fund as a result of administration costs, JSE membership fees, directors’ fees, audits, and all those types of costs, which will now be saved as a result of delisting the Ascension Fund. That will obviously accrue to the Rebosis shareholders, so there’s a significant benefit there from acquiring 100 percent.
GUGULETHU MFUPHI: Well, thank you so much to Paul Duncan. He’s from Catalyst Fund Managers, speaking to us from our Cape Town studios.
