Capital forces bidding war

Takeover target Capital Properties is forcing the hand of predator Kiwi Income Property Trust by putting its $50 million management rights on the block.

Capital catapulted the Colonial-controlled Kiwi into a bidding war with other Australian and New Zealand fund managers for control of its portfolio worth almost $500 million.

Promising a windfall for its 17,000 mainly retail investors, Capital chief executive Chris Gudgeon said he expected intense interest in the management rights to Capital's portfolio.

Capital chairman Colin Beyer said the company would distribute all the sale money and its management rights had not been properly recognised by the market but putting the contract up for sale was in the best interest of all shareholders.

But all that changed yesterday when Capital said it would pay all the funds to its shareholders. Capital has 240 million shares on issue so the $50 million gift could give investors a potential windfall 20c a share. Capital shares, which traded at 98c in October, closed 2c up at $1.15 yesterday.

Kiwi is seen to be the most likely buyer of Capital's management rights, having just become its largest shareholder with the most at stake.

Kiwi's management company, controlled by Colonial in Australia, swooped on a cornerstone 19.9 per cent of Capital on Friday last week, paying a premium $1.15 a share and forking out $53.4 million.

McNaughton said the two entities already had a relationship through their joint ownership of Auckland's twin-tower National Bank Centre.

Capital's answer was for Beyer to demand Kiwi show its hand, making the takeover offer to all shareholders.

The only listed real estate trust or company without an external manager, Capital has put no time frame on its management sale, saying only that it wants expressions of interest.

"We've already had positive reaction from our major shareholders except Kiwi," Gudgeon said, adding that ING holding 5 per cent and Alliance Capital Management with 1 per cent hailed the sale for shareholder benefits and because itcrystallised the true value ofthe management contract.

Beyer signalled the start of a struggle for control.

"We expect that there will be a high level of interest from a significant number of fund managers in the opportunity to acquire the management rights," he said, hinting that a figure well over the usual 10 per cent of assets under management could be achieved.

"The value of the management rights, if sold following a contestable open market process, could be considerably in excess of that recognised in other circumstances."

Capital is further upping the ante on Kiwi by revaluing its portfolio, following what Gudgeon called "recent substantial rental growth, movement in capitalisation rates precipitated by Australian property investors and the value of the company's development opportunities".

WHAT'S BEHIND THE DEAL?

Property management contracts are usually valued at about 10 per cent of real estate assets.

An internationally focused Australian funds manager is the most likely buyer of Capital's management contract.

Colonial-controlled Kiwi has made a play on Capital but has not declared its intentions.

Fund managers like Colonial need to expand because increasing assets increases their income and fees.

Capital shareholders will benefit from the sale and any full takeover offer.

But Kiwi unit holders are seen to be the ultimate losers.

Any script issue to fund the deal would dilute unit values, yet they earn no more from managing more funds.