- Shares in both companies fell after announcement
- New company's market capitalisation could be £3bn
The idea of a merger between the West End’s two biggest landlords, Capital & Counties (CAPC) and Shaftesbury (SHB), has long been a topic of speculation, and now it looks close to reality. A new structure has already been hashed out by the two real estate powerhouses and major shareholders have signed off on the idea.
The move has the potential to create a £3bn landlord – similar to Derwent London (DLN) in size – which would own almost 3mn square ft (sq ft) of prime London real estate.
But the initial market reaction was far from celebratory. When trading began on Monday, Capco shares plunged 8 per cent before recovering to 3 per cent down by the afternoon. It was a similar story for Shaftesbury’s shares, which dropped 5.5 per cent before recovering to around 2.5 per cent down.
Neither company has yet outlined a case to shareholders for the merger to take place. In Capco's last annual report, chief executive Ian Hawksworth said he would continue with a strategy of "aggregation of ownership in the Covent Garden area" and talked of ambitions to grow the business. Under this merger deal, Shaftesbury shareholders (excluding Capco and its 26 per cent existing stake) would hold 53 per cent of the combined companies, while Capco would hold the rest.
For shareholders in both companies, it means the opportunity to own shares in a much larger real estate investment trust (Reit), especially important given the outsider interest in the vehicles right now.
“If you are bigger, it’s harder for people to take you out because there’s strength in numbers,” said Stifel analyst John Cahill. "That said, with some of the overseas capital, their pockets are so deep that they could even take over the expanded company.”
The new company would have greater cash reserves, giving it the opportunity to expand further. According to their latest results, the two companies have a combined £530mn in cash and cash equivalents in their coffers, yet this firepower might not get them very far in the West End real estate market.
“Assets in the West End don’t come to the market very often,” said Cahill. “And if they do, there are a lot of people who are prepared to pay very high prices.”
One thing shareholders might not appreciate is the change in management. While the resulting company would be led by a mixture of Shaftesbury and Capco executives, Shaftesbury chief executive Brian Bickell is set to retire on completion of the deal while executive directors Simon Quayle and Tom Welton, who have also been with the company for over 30 years, would also leave the business.
“If you’re a Shaftesbury shareholder who likes the very specific way that business has been managed for 30 years, you might not be keen on a change of direction,” said Cahill.
A merger of the companies has been a long time coming. After Capco bought Hong Kong investor Samuel Tak Lee’s 26 per cent stake Shaftesbury in June 2020, many believed that a deal could be on the cards. Capco initially said it would likely be a post-Covid-19 discussion.
The question now turns to if and when the deal will get over the line. Despite the similarity between the two companies as West End landlords, Cahill does not believe that Competition and Markets Authority (CMA) will be against it.
“The CMA could get involved,” he said. “But actually, when you look at what they own, the only overlap is in Covent Garden. The rest of the assets, although they are near each other, don't particularly overlap.
“Is it anti-competitive? Well, if a tenant wants to move onto Carnaby Street, they’re not looking at Covent Garden at the same time. And if you look at the whole of the West End, while these Reits two are big, there are thousands and thousands of other owners.
“If it did get referred to the CMA, I think ultimately it would be approved.”
The deal is also unlikely to face much opposition internally, either. Norges Bank is seen as kingmaker – with 25 per cent ownership of Shaftesbury and 15 per cent of Capco – and has given the deal the nod.
With the Norwegian bank's blessing, no likely issues from the CMA and some big pluses for shareholders, the merger could prove mutually beneficial, although the negotiations around final terms could still bring on complications.