Morgan Stanley offers $5.4 billion for Investa

The real estate arm of the US bank will buy the Australian property trust at a 56% premium to its net tangible assets.
The real estate funds division of Morgan Stanley has made an all-cash bid of A$3.08 per stapled security to shareholders in the Australian listed property trust Investa Property Group. The purchase will be conducted via a scheme of arrangement and values Investa at A$6.6 billion ($5.4 billion), or a 56% premium to its net tangible assets.

Investa is AustraliaÆs eighth largest LPT by market cap and focuses on commercial property in the countryÆs large cities, though it has also recently purchased a residential housing development company. Morgan Stanley says it is the assets in the gateway cities that attracted the bank to the portfolio. ôInvestaÆs portfolio of attractive assets in AustraliaÆs major cities is a natural extension of our global real estate investing strategy of buying into gateway cities around the world,ö says Steven Harker, CEO of Morgan Stanley Australia.

The price of A$3.08 represents a 13% premium to the volume weighted average price over the last 30 days and a 23% premium to the VWAP over the last six months. Yesterday, following the deal announcement, Investa's shares traded up 41 cents or 15% to A$3.10 helping to boost the broader S&P/ASX200 which rose 1.1% on Thursday.

ôThis suggests that Morgan Stanley has probably priced the assets right,ö says a source familiar with the transaction. ôIf they had mis-priced the deal, then the shares would have traded above A$3.30.ö

Though it should be noted that the offer is cum distribution which means it will be reduced by the amount of InvestaÆs dividend for the half year ending 30 June.

InvestaÆs board has recommended the offer, in the absence of a better one, and Morgan Stanley has until the end of this month to lodge a scheme booklet with regulators. If it obtains the necessary approvals, it expects to wrap up the deal in September.

It is uncertain whether another bidder will appear to trump the A$3.08 bid. At a total value of A$6.6 billion, the transaction is large compared to other deals completed in the LPT sector. According to Dealogic data, the Investa deal is the third largest M&A transaction in the history of the property industry, but the top two spots are held by Westfield which conducted a wholesale restructuring of its assets in 2004 (in two transactions worth over A$10 billion each).

ôYou couldnÆt really call these comparable deals since they were part of an internal reorganisation,ö says the source. ôSo really, the Morgan Stanley deal is the largest third-party transaction in the country so far,ö he says, adding that there hasnÆt been a similar deal done in the last three to four years. ôThere was a lot of consolidation in the industry around 2003 and 2004 but large-scale M&A activity in the sector has been quiet since then.ö

The source says Investa and its peers in the LPT sector have been growing by adding smaller bolt-on acquisitions. ôThat means that trusts like Mirvac, Stockland or GPT would need to divert significantly from their strategies in order to counter Morgan StanleyÆs bid. If a counter offer is made, itÆs more like to come from offshore.ö Morgan Stanley has negotiated a break fee of A$20 million if Investa strikes a deal with another bidder.

Investa was born out of Westpac Property Trust in 2001. It started with assets under management of less than A$1 billion and by the end of the 2006 financial year had grown this pool by 515% to A$7 billion. In 2003, it acquired TelstraÆs portfolio of assets and then, in 2004, the Principal Office Fund.

These acquisitions have given the trust scale. For the year to June 2006, Investa reported revenues of A$1.3 billion, net profit of A$334 million and a total return on funds employed of 12.3%. The trustÆs internal portfolio includes 34 commercial office buildings with 90% of these in the premium and A-grade category. The properties have an occupancy rate of 97.6% and an average lease expiry of 5.5 years.

At a Reit conference conducted in Hong Kong in March this year, InvestaÆs head of corporate finance and strategy, Michelle Dance, told bond investors that the fund was diversifying by managing external funds and building a portfolio of commercial developments, which at the end of December last year was valued at A$1.5 billion. ôTo increase the returns from the development business, our strategy is to sell the investments early in the development process,ö said Dance. ôThis can produce a higher IRR outcome.ö Last year, Investa cemented its presence in the development space by buying Clarendon, a residential housing developer with an extensive land bank in four Australian states.

Morgan Stanley is funding the purchase of Investa with A$4.7 billion in equity and A$1.9 billion in debt. The debt has already been secured and while details of its structure havenÆt been released, a source says it contains a mixture of short- and long-term funding. He says it is likely that Morgan Stanley will maintain the trustÆs conservative gearing ratio.

The bank also plans to retain the current management of Investa.

Morgan Stanley is being self-advised on the transaction, while Investa is being advised by UBS.
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