BULL POINTS:
■ Potential takeover of Brixton
■ Finances sorted out
■ Vacancies under control
■ Respectable dividend yield
BEAR POINTS:
■ Risks of taking on Brixton's debt
■ Tough leasing market ahead
When industrial-property investor Segro announced it was considering an a fortnight ago, its share price hardly reacted, but Brixton's shot up 26 per cent on the day. Yet the prospect of Segro riding to the rescue of a company weighed down with - albeit one with good quality industrial properties - is difficult for investors to grasp. Only three months ago Segro was forced to raise £500m through a rights issue and renegotiate its banking covenants to avoid debt problems of its own, and is actively pursuing several asset sales. These moves have insulated its balance sheet against future falls in property values, but only up to a 30 per cent drop, so some may question the logic of mounting a bid for Brixton.
There has been no sign of a firm offer yet, but Segro looks ideally placed to drive a hard bargain. Brixton's shares are trading at 70p, and investment bank JP Morgan estimates net asset value of 91p per share. This assumes a portfolio writedown of 24 per cent, but ignores the collision course the company is heading for over its banking covenants at the end of this month.
City analysts think Brixton will need at least £300m of fresh equity to avoid breaching terms on its borrowings, which seems a big ask. Three-quarters of its debt pile is in bonds, of which £275m-worth are due for repayment next year.
Several private equity names are also said to be stalking Brixton, but a bidding war seems unlikely. For starters, the level of outstanding bond debt means that any sale would be subject to support from the credit ratings agencies, or persuading the bond holders to roll over their commitment. A difficult task, this would nevertheless be easier for a quoted real-estate investment trust, such as Segro, to pull off.
| SEGRO (SGRO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 27p | MARKET VALUE: | £1.53bn | |
| TOUCH: | 26-27p | 12M HIGH | 87p | LOW: 14p |
| DIVIDEND YIELD: | 5.2% | TRADING STOCK: | £358m | |
| PREMIUM TO NAV: | nil | |||
| INVEST PROPERTIES: | £4.3bn | NET DEBT: | 77% | |
| Year to 31 Dec | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2005 | 123 | 582 | 16.6 | 3.2 |
| 2006 | 130 | 506 | 32.4 | 3.4 |
| 2007 | 125 | -247 | -9.7 | 4.2 |
| 2008 | 46 | -939 | -39.1 | 1.4 |
| 2009* | 27 | na | 1.6 | 1.4 |
| % change | -41 | - | - | nil |
Normal market size: 30,000 Matched bargain trading Beta: 1.03 *JP Morgan forecast | ||||
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Then there is Brixton's high vacancy rate of 20 per cent, which is off-putting for private equity, particularly as business rate relief on empty industrial property has been abolished. Segro, which has managed to keep vacancies in its own portfolio to 11 per cent, has the infrastructure and management in place to tackle this problem head on.
However, market conditions are getting tougher. In April, Segro said that it had lost nearly £1m of rental income so far into 2009 due to tenants going bust. And a further £3.6m is at risk from tenants currently in administration (that is 2 per cent of its rent roll). That said, its exposure to developments is low, and lettings are up on the equivalent period a year ago.
Another intriguing angle is the number of shareholders Segro and Brixton have in common. Segro's top 15 shareholders also control just over 25 per cent of Brixton. It stands to reason that if Segro's directors can win the support of the institutions, they may even support a fund-raising to buy back the bond debt below par. The company's own net debt has been reduced to £2.0bn from £2.5bn as a result of its rights issue, and its weighted average cost of debt is 5.3 per cent.
