Kiwi takeover of Capital predicted

Listed landlord Kiwi Income Property Trust will make a full takeover attempt on the $500 million Capital Properties via a share-unit swap, an analyst predicts .

Blair Cooper of Smith Barney, a division of Citigroup Global Markets, said Capital shareholders would have their investment swapped for scrip in Kiwi.

He also investigated Capital's proposed sale of its management contract, which some have valued at about $50 million. He found shareholders could get less money in dividends if the sale went ahead.

Cooper ranked Capital as a stock to sell. It was "simply too expensive" and had a big downside because of the proposed management sale, his report said.

"The prospects of such a sale unlocking material value for Capital shareholders is low. "We note that every dollar paid to the manager over and above the current cost base will reduce the sustainable dividend and could be expected to result in a decrease in share price.

"Shareholders are simply exchanging an up-front payment for a reduction in dividends over the life of the management contract."

The recommendation to sell the stock reflected a belief that Capital's shares looked expensive on fundamental and historical measures, Cooper wrote.

He predicted a full takeover bid from cornerstone shareholder Kiwi and said it was likely to be a scrip-based deal - Capital shareholders will have their shares exchanged for Kiwi units.

"We value this outcome at below Capital's present share price," he wrote. Capital's shares are trading at around $1.18.

Management sale opponent and Kiwi chief executive Angus McNaughton backed the analysis, saying it showed the true negative implications of Capital's management sale deal.

"The value of the management rights is fully priced in the share price - the $50 million doesn't come out of fresh air," McNaughton said.

"A buyer will only pay $50 million on the basis of a contract with a fee structure paid out of distributions so the share price will come down."

But Capital's board has hit back, questioning Kiwi's motives for calling a special meeting to discuss the management sale and accusing it of trying to get a valuable asset for nothing.

An ABN Amro Craigs report, prepared by Mark Lister and Benedict Slykerman, reached the opposite conclusion to Cooper's report. It told clients not to sell Capital shares and predicted a one-off capital distribution of 13.3c a share when the management rights were sold for between $22.9 million and $50 million.

Capital's board was serving shareholders better than a trust's management structure because the board's interests were the same as the investors' interests thanks to "a unique governance structure".

The only risk, it warned, was an economic downturn, which could damage rental growth.

One analyst said the public wrangle between the two - largely waged via announcements to NZX late last week - was of no help to investors, and major shareholders would decide on facts not insults, most voting before any Capital shareholders' meeting.

Last week, McNaughton called the proposed sale "an abrupt and fundamental departure from Capital's long-standing structure and strategy".

But his two separate complaints to regulators late last year were both rejected. McNaughton complained to the NZX and the Takeovers Panel about the sale, but the panel rejected his grievance last month and, last week, the NZX also knocked back the complaint.

Capital chief executive Chris Gudgeon said many expressions of interest had already been registered for the management rights.

Capital chairman Colin Beyer said Kiwi had not made a bid for Capital's management.

"Kiwi ... has had the opportunity to acquire the management rights in the open contestable process we are running but has chosen not to participate," Beyer said. "Our view is that this is because Kiwi's clear preference is to have unit-holders pay for the management rights as part of a possible future takeover of Capital Properties."