Merger will create the fifth largest property company

Directors of listed Property for Industry and unlisted Direct Property Fund are enthusiastically backing a merger proposal.

When shareholders give approval it will create the fifth largest property company and 29^th largest listed company.

It will have assets of $814 million. The biggest listed property company is Kiwi Income Property Trust at just over $2 billion in assets, Goodman Property at $1.8 million, Precinct Properties at $1.4 billion, and Argosy at just above $1 billion in assets.

In a Stock Exchange announcement last week, the directors said they had reached agreement on terms to proceed with the merger.

Today they released supporting independent reports from Deloitte and PwC.

The reports support the merger as having benefits for both sets of shareholders.

The new entity would have a management expense ratio in the mid-range when compared to other listed property companies.

“Independent” manager PFI will be retained for the enlarged company. The board of this company includes Aucklander Greg Reidy, managing director of McDougall Reidy & Co, widely considered to be the driving force behind the merger, which is effectively a back door listing for DPF.

Mr Reidy is also a director of Direct Property Fund and its manager, DPF Management.

The seamless changeover means little disruption to the management team and no major costs of buying out a redundant manager.

Analysts have pointed to PFI’s relatively small size as a hindrance to expansion and investor returns.

Forsyth Barr research recently rated PFI stock a “hold” in the face of an anticipated lower distributable profit due to asset sales and increased vacancy, with improvement tipped for later in the year.

PFI is New Zealand’s only listed company specialising in industrial property. It has a portfolio of 50 properties in Auckland, Wellington and Christchurch leased to 84 tenants and valued at around $350 million last year.

Direct Property Fund is unlisted and holds 33 properties commercial and industrial properties in Auckland, Hamilton, Tauranga and Wellington leased to 55 tenants and valued at around $400 million.

The terms of the merger recognise historical trading multiples for each entity, the historic earnings profiles, the portfolio characteristics, costs associated with PFI raising capital to buy Direct Capital’s assets, versus costs of Direct Property listing independently, plus indexation and liquidity benefits for both companies.

The PwC appraisal reports on the fairness of the revised base fee structure, which reflects a blending of the current PFI and Direct Property base fees.

As previously announced, the deal requires a court approved scheme of arrangement, with settlement targeted for July1, 2013.

PFI and DPF have applied to the High Court for initial procedural orders relating to the proposed merger. 

c.hutch@clear.net.nz