LONDON, UK: Brighton Bidco Limited and St. Modwen Properties PLC have reached agreement on the terms and conditions of a recommended all cash offer by Bidco for the acquisition of entire issued, and to be issued, ordinary share capital of St. Modwen.
Under the terms of the acquisition, each St. Modwen shareholder will be entitled to receive 542 pence in cash for each share.
The acquisition values St. Modwen’s entire issued, and to be issued, ordinary share capital at approximately £1.237 billion.
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.”
Background to and reasons for the 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.
Conclusion
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.
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