An unlikely twist could still derail NPT’s Kiwi deal

NPT Ltd shareholders can replace 2 of their 3 directors with Augusta Capital Ltd nominees at a special meeting called for 21 April, but won’t have the opportunity to vote on Augusta’s proposals for changing their company because Augusta has withdrawn it.

The NPT board has recommended a proposal from Kiwi Property Group Ltd, under which Kiwi would become a 19.9% cornerstone shareholder through the issue of $48 million of new shares and would sell 2 buildings to NPT. That proposal will require NPT to borrow $87 million and raise $94 million from shareholders through a pro rata entitlement offer.

The notice of meeting, sent out yesterday, contains a 2-part resolution authorising the $230 million purchase of the Majestic Centre in Wellington & North City shopping centre in Porirua, and authorising the issue of shares to Kiwi.

The remaining resolutions are to remove directors Tony Sewell & Jim Sherwin, leaving Carol Campbell as the one remaining member from the existing board, and appointing Augusta nominees Allen Bollard, Bruce Cotterill & Paul Duffy.

Tony Sewell.

Mr Sewell, former chief executive of Ngai Tahu Property Ltd, joined the NPT board last August and replaced Sir John Anderson as chair on 17 March. Sir John had headed the board for 6 years.

Mr Duffy, former DNZ Property Fund Ltd (now Stride Property Ltd) chief executive & executive director, joined Augusta’s board last November and took over chairing it in December.

Assuming support for the Kiwi deal, those board changes would be an off-the-wall extreme. NPT’s board saw this as a proposal in Augusta’s own interests.

Management contract offers

Augusta Capital Ltd bought 9.26% of NPT last September and proposed injecting 3 properties worth $327 million into the company, buying out the management contract for $3.5 million and, because of the NPT board’s resistance, replacing the 3 directors.

In December, Kiwi came to the NPT board’s rescue with a proposal to inject 2 of its properties, becoming a cornerstone shareholder, also buying out the management contract, but leaving the NPT board intact for the moment though with a succession plan.

The management contract buyout will cost Kiwi $6 million. Either party can terminate the management agreement after 5 years on payment of a termination fee to Kiwi.

In yesterday’s meeting announcement, Mr Sewell said externalising management wasn’t the NPT board’s preferred position, because the company only internalised it in 2010, but it was an integral part of Kiwi’s proposal: “After taking into account the benefits that a strategic partnership with Kiwi Property is expected to provide to NPT, the appointment of Kiwi Property as manager of NPT & its property portfolio on the terms negotiated with Kiwi Property is acceptable to the board, particularly as the management agreement includes the right for NPT to terminate.”

Mr Sewell said NPT & Kiwi had finalised terms and entered into conditional agreements to give effect to the proposal. Mr Sewell said: “The NPT board supports the Kiwi Property proposal, which it considers to be a transformational transaction that would reposition NPT with the scale & resources to best serve its shareholders’ interests into the future, and unanimously recommends shareholders vote in favour of the proposal.”

Mr Sewell said the Kiwi deal was expected to increase NPT dividends for the March 2018 year by 7%, pro forma.

He said the terms of the entitlement offer hadn’t been determined yet, but expected NPT would send an offer document to shareholders in late April.

Assessment of Augusta proposal

Although the Augusta proposal is no longer before shareholders, NPT included an assessment of it in its notice of meeting.

The NPT board said the Augusta proposal:

  • would result in a significant decline in NPT’s earnings & dividends relative to its projected earnings & dividends on a standalone basis (this compares to an expected increase in earnings & the level of dividends for the 2018 financial year under the Kiwi proposal relative to NPT on a standalone basis)
  • was highly reliant on an increase in NPT’s gearing position (total debt:total assets) to a level higher than under the Kiwi proposal in order to achieve any enhancement in earnings or dividends for shareholders compared to the expected position for NPT for the next financial year, and
  • the properties to be acquired under the Augusta proposal are lowrise Auckland office buildings with the majority of the rent received from single tenants. The board was concerned that the low yields offered by the buildings did not take into account longer-term tenancy risks and provided NPT with no real options in the event of increases in interest rates
  • NPT would be insufficiently compensated for selling effectively perpetual management rights to Augusta. The payment proposed by Augusta was the lowest under the proposals NPT received
  • there is potential development risk associated with the Augusta proposal, with construction of one of the 3 properties to be acquired having only just started (this property would represent about 28% of the NPT portfolio by value post-transaction on a pro forma basis)
  • the properties to be acquired under the terms of the Augusta proposal were not owned by Augusta and Augusta did not necessarily have direct control over them, thereby introducing significant transaction uncertainty relative to the Kiwi proposal, and
  • the amount of additional debt & equity capital required by NPT under the Augusta proposal was significantly more than under the Kiwi proposal. There would therefore have been substantially greater execution risk under the Augusta proposal.

NPT has called the special meeting for Friday 21 April (11am at Link Market Services Ltd, Deloitte Centre, 80 Queen St).

Kiwi weighs in with support for deal

Kiwi Property also stated its own view yesterday on how the 2 listed companies would progress their relationship. Kiwi chief executive Chris Gudgeon said: “The partnership proposal will align the interests of the 2 listed property companies and provide a clear pathway to grow value for both companies. The proposal has the potential to deliver NPT shareholders with an immediate lift in earnings and increases NPT’s scale & relevance, positioning the company to grow & prosper.

“Our proposed management agreement with NPT is best in class and offers NPT shareholders an ability to terminate the agreement without cause, if they should ever deem this to be in the best interests of the company, at some point in the future.

“Kiwi Property’s interests will be aligned with NPT shareholders’ through its 19.9% shareholding in NPT and we will be strongly motivated under the terms of the management agreement to perform for NPT shareholders.”

Kiwi chair Mark Ford said: “This partnership proposal is a logical opportunity to create further value for our shareholders by using our existing property & funds management platform to generate additional management fee income.

“We will retain an interest in North City shopping centre & the Majestic Centre through our shareholding in NPT, and the proposal also serves to release capital which we can use to fund our planned expansion of Sylvia Park shopping centre.

“If we receive the support of NPT shareholders to our proposal, we can help drive NPT’s future investment performance by using our specialist management capabilities to intensively manage their assets and by seeking investment opportunities that create further value for NPT shareholders.”

Earlier stories:
27 March 2017: Kiwi proposal for NPT finalised “in next few days”
6 March 2017: NPT works through detail of Kiwi bid
12 January 2017: Augusta drops court action but NPT meeting likely delayed
8 January 2017: NPT interim report shows company treading water
14 December 2016: Kiwi proposal for NPT revealed
2 December 2016: Augusta gets February court date while NPT continues with meeting plan
23 November 2016: Lack of revaluations halves NPT profit
4 November 2016: NPT considering more than just Augusta’s proposal
31 October 2016: 
Fourth era for NPT a hard option to combat
27 September 2016: Augusta buys 9% of NPT

Attribution: NPT & Kiwi releases, proposal documents.

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