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Private equity buyers are attracted to real assets which have historically done well in times of rising inflation
Thursday 08 Jul 2021 Author: Daniel Coatsworth

Property assets have become the common theme connecting this year’s flurry of takeovers on the UK stock market.

As Shares went to press, Morrisons (MRW) was subject to a bidding war and GCP Student Living (DIGS) had just received a takeover approach. In May, both Spire Healthcare (SPI) and St Modwen Properties (SMP) were subject to bids.

All four of these companies own significant amounts of property – something that falls under the category of real or tangible assets alongside commodities. These assets have historically done well during a period of rising inflation, such as we are now seeing.

Rising prices can boost the resale value of property and the amounts tenants pay in rent. Inheriting property assets as part of a company takeover also provides options for the buyer to sell them in the future and realise any hidden value.

Fortress says in its bid for Morrisons that it wouldn’t engage in any material store sale and leaseback transactions, which is the opposite of what one might expect from someone trying to buy a property-rich business.

That approach might play well to the supermarket’s internal culture but ultimately shareholders will decide which suitor wins, most likely based on the price per share offered rather than promises of maintaining a consistent culture.

‘There is significant dry powder in private funds seeking to acquire real assets,’ says Liberum, referring to how private equity companies are flush with cash and ready to do deals.

‘We believe that bids for quality portfolios of assets will continue, particularly when public market pricing is depressed by short-term factors and private buyers can take a longer-term view on the underlying investment case.’

While demand is growing for companies with real assets, it is also worth noting that the first bid may not necessarily be the final one.

Private equity companies are eager to do deals, but they also want to see if they can buy companies at the lowest price that could be considered reasonable.

Morrisons was right to reject a 230p per share approach from CD&R as Fortress was quick to offer more at 254p per share. With Apollo in the frame to potentially make a bid, the final takeout price could be even higher.

The board of St Modwen recommended a 542p per share price offer but that was considered too low by some of its biggest shareholders and they fought for a higher price, with Blackstone then agreeing to pay 560p per share.

Several of Spire Healthcare’s big shareholders pushed back against the 240p per share offer from Ramsay Health Care recommended by the target’s board. They said the £1 billion offer could be the value of Spire’s freehold property assets alone, meaning the suitor would be paying nothing for the operating business. On 5 July, Ramsay raised its bid to 250p per share.

We’re in the middle of a takeover frenzy involving UK stocks and it would be wise to sit tight should any of your portfolio companies receive an offer. The average premium paid for all deals involving UK stocks since October 2020 is 37%, but the actual amounts vary from company to company.

It would seem sensible not to rush and sell in the market immediately upon a bid as you just might see a higher offer judging by recent transactions.

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