Singaporean investor ARA Asset Management Ltd launched an open attack last week on Brisbane-based fund manager Cromwell Property Group’s board with a partial share offer, which the Cromwell board promptly rejected as inadequate.
Cromwell owns 50% of unlisted New Zealand fund manager Oyster Property Group Ltd. The other 50% is held by local founding investors & staff.
ARA, headed by group chief executive Lim Hwee Chiang (John Lim), bought 19.5% of Cromwell in March 2018 and had increased its stake to 24% when, last Tuesday, it announced its intention to offer to acquire 29 Cromwell securities for every 100 owned at a cash price of A90c/security, which would take its stake to about 46%.
Cromwell, which hasn’t allowed ARA a seat on its board, responded with open animosity on Wednesday, issuing a statement headed: Directors intend to reject the unsolicited & opportunistic ARA proportional takeover bid.
Cromwell said in its statement: “ARA’s offer is a discount of at least 10% to Cromwell’s estimated pro forma NTA/stapled security as at 30 June 2020 and ignores the value associated with Cromwell’s funds management business, which had $A8.3 billion of funds under management as at 31 December 2019.
“(The) offer undervalues the business, represents a takeover by stealth and does not reflect an appropriate premium for control. Cromwell’s NTA & valuations prove resilient, (and the) business continues to perform strongly.”
One significant point of contention concerns ARA’s nominee for the Cromwell board – longtime corporate raider Dr Gary Weiss, who’s been a director of numerous entities in the realm created by Sir Ron Brierley.
ARA said in its proposal:
- Its offer price represented a premium of 9.8% to the 30-day volume-weighted average price of A82c/share
- The offer would represent a certain & immediate cash return while allowing securityholders to continue participating in the upside from any turnaround
- The offer would provide liquidity in uncertain market conditions and was attractive given the potential of a dilutive capital-raising as a result of Cromwell’s elevated gearing & exposure to Polish retail assets, and
- ARA intended to drive a vital process of board change & renewal to improve governance and urgently address deteriorating operational performance.
Cromwell said the offer price was a discount of at least 10% to Cromwell’s estimated pro forma net tangible assets/stapled security as at 30 June (tomorrow) and ignored the value associated with Cromwell’s funds management business, which had $A8.3 billion of funds under management as at 31 December 2019.
In short, Cromwell said, “(The) offer undervalues the business, represents a takeover by stealth and does not reflect an appropriate premium for control. Cromwell’s NTA & valuations prove resilient, business continues to perform strongly.”
The Polish question
Cromwell explained its most recent European investment, in Poland, in a business update on 4 June: “Cromwell acquired third-party investment interests in the Cromwell Polish Retail Fund in late October 2019. The fund consists of 7 assets anchored by the French grocery giant Auchan, and was in the process of being restructured as an EU alternative investment fund, managed by Cromwell’s Luxembourg-regulated manager, when the Covid-19 lockdown was announced in Poland. The subsequent selldown, targeting an eventual long-term co-investment stake of 20-30%, is on hold.”
Lim: No choice
Mr Lim said in Tuesday’s offer statement: “ARA has been left with no choice but to pursue this course to try & restore value for the benefit of ARA & all security holders in Cromwell. We seek change based on our strong belief that the existing Cromwell strategy is failing and exposing our investment to unacceptable risks.
“This is magnified by poor cost control by management, at times inexcusable largesse, and weak corporate governance.
“Among several reasons, including as a result of a lack of proprietarial oversight, Cromwell security holders have suffered from continued operational underperformance. This is evident by a number of factors including:
- significant deterioration in Cromwell’s operating earnings/share, that dropped every year between the 2017-2019 financial years despite strong rental growth & capital appreciation in the commercial real estate markets during the same period
- a material 13.1% reduction in distributions/security from A8.34c/share in the 2017 financial year to A7.25c/share in 2019
- increased debt on a reported basis to the top of the board’s target gearing range of 30-40%, while lookthrough gearing is materially above this range, with leverage used to fund the acquisition of high risk Polish retail assets, and
- a poor international track record with continued investment into the European property market at the expense of investing in one of the best commercial property markets in Australia’s history.”
For example, Mr Lim said, management had used shareholder funds to:
- acquire Valad Europe for $A208 million, with transaction goodwill of $A143 million subsequently written off within 3 years of the acquisition, and
- acquire, on balance sheet, a portfolio of Polish shopping centres for close to $A1 billion, which is now likely subject to significant value reduction.
“Despite the poor performance in Cromwell, corporate costs have ballooned by 48.3% and the chief executive’s statutory remuneration increased by 34.1% from the 2018 to 2019 financial year. In addition, we are yet to see any announcement around reductions in compensation by Cromwell’s management team or board of directors that has prevailed amongst many of Cromwell’s ASX-listed peers during Covid-19.
“What is exceptionally disappointing is that so many individual Cromwell security holders placed their faith in the board & management’s ability to restore wealth & the company fortunes, only to find their loyalty sadly misplaced.
“Notwithstanding comment from the Cromwell chief executive Mr Paul Weightman in the Australian Financial Review on 14 May that ‘we’re not considering raising capital’, given Cromwell’s elevated gearing levels & the uncertainty surrounding rental collections & asset values as a result of Covid-19, ARA is concerned that Cromwell will seek to undertake a material equity-raising at a discount to the offer price.
“ARA has continued to publicly raise its concerns and has sought to have its representative, Dr Gary Weiss, appointed to the Cromwell board. In response, Cromwell has continued to discriminate against ARA and display antagonistic behaviour, despite the board’s clear fiduciary obligation to represent the best interests of all security holders, including those who may be critical of the company’s recent performance & strategy.”
Li Ka-shing helped Lim start ARA
Mr Lim founded ARA in 2002 with backing from legendary Hong Kong investor Li Ka-shing, and has been expanding the business rapidly in the last 2 years, including taking a majority stake in Australian developer Logos Property Pty Ltd in March. Logos has expanded into New Zealand, and into China.
When ARA bought its 19.5% stake in Cromwell in March 2018, ARA had $S40 billion of assets under management and Cromwell had an $A2.5 billion directly held portfolio in Australia and total assets under management of $A11.2 billion across Australia, New Zealand & Europe.
ARA puts its current assets under management at $S88 billion. At 31 December 2019, Cromwell had market capitalisation of $A3.1 billion, its direct property investment portfolio was valued at $A3.2 billion and it had total assets under management of $A11.9 billion in Australia, New Zealand & Europe.
Currencies: At today’s exchange rates, a Singapore dollar buys $NZ1.12 and an Australian dollar buys $NZ1.07. I’ve left currencies as they’ve been referred to by the parties rather than introducing conversions throughout the story.
ARA, 23 June 2020: Proportional takeover offer for Cromwell Property Group
ARA, 18 March 2018: ARA to acquire 19.5% interest in Australia’s Cromwell Property Group
Cromwell Property Group
Cromwell: ARA Asset Management & Tang Group relationship & ARA proportionate offer
Cromwell, 24 June 2020: Cromwell directors intend to reject ARA bid
Cromwell, 17 March 2020: Dr Weiss not a suitable candidate for Cromwell’s board – substantial overcommitment & conflicts
Earlier stories on this website:
15 April 2020: Backgrounder: International industrial property expansion – Logos, ARA, Goodman links, Ivanhoé Cambridge, Plenary Americas, CBRE Global Investors, Toll & Japan Post
12 March 2018: Singapore reit manager ARA buys 19.5% Cromwell stake
13 December 2017: Cromwell makes placement to Singaporean investors in its new European reit
6 June 2014: Cromwell buys half of Oyster, McKellar to chair it
28 September 2009: Brisbane trust with NZ connections promotes new syndicate
Attribution: Cromwell & ARA releases.