Inside Track by Mark Stretton
The implosion of the £2bn Vector IPO has left something of a vacuum. The deal, which was to be the UK’s first leisure real estate investment trust (Reit), would have seen an eclectic swathe of hotel assets owned by MWB, RBS and Richard Balfour-Lynn placed into a publicly-quoted property group. When the float was postponed due to investor concerns over the future direction of commercial property values plus some pertinent corporate governance issues, it seemed a rather unpalatable dose of reality had been served up for those hoping that Reits heralded a brave new and tax-efficient world for leisure-asset ownership. Without wanting to state the obvious, the Vector transaction has been an acutely embarrassing flop for all involved, possibly diverting a host of companies from what many hoped would become a well-trodden Reit path. The sobering Vector issue took centre stage at a timely gathering of the leisure industry last Thursday, held jointly by Hotel Report, Leisure Report and M&C Report, which was called to examine the pliability of Reits to a range of leisure assets such as hotels, fitness clubs, pubs, bars and casinos. General consensus at the UK Leisure: is it Reit up your street? seminar suggested that the failure of Vector to win sufficient support from institutional investors had been due to an inadequate structure, and a perception that the IPO was a convenient vehicle for the partially exiting parties to crystalise huge profits, rather than a compelling investment opportunity for London’s major share funds. “There was a perception that leisure assets put together with Reits would equate to bags of money, but as we’re seeing this is not necessarily the case,” said Jim Fallon, managing director of McQueen, the M&A market practitioner. There was however a conviction that Reits were still a viable vehicle for the right companies. “A Reit will make a good company better, but it will not make a bad company good,” said Geof Collyer, the Deutsche Bank leisure analyst. The real issue, the crux of all this debate, was the separation of assets from operations, the so-called opco-propco structure. It is a big call for many groups, and one not to be taken lightly, expert speakers warned. This divorce is a process that has been underway for some time in leisure, most notably in the international hotels game, where many have focused on brand management rather than property ownership. The message was that if a company decided it was right to relinquish an asset – like some hoteliers have – then a Reit was an eminently sensible home for it, given the material tax benefits. Neil Gillis, the former CEO of Esporta, suggested that a unique asset that genuinely added value to a business, such as some of the premium racket clubs he used to run, was too precious to be sold and cast off into a property vehicle. But Reits made sense for ubiquitous city-centre “box” properties, such as those that are home to budget hotels and members-only gyms. Others, such as M&A specialist Ian Edward and private equity boss Jon Moulton, said the debate about Reits was driven by leverage. Shareholders – whether private equity or public institutions – want to see companies optimising leverage through the debt markets, which is most effectively achieved through an opco-propco structure. Add in the associated tax gains, and Reits seemed to be the hot ticket in town. Investors are also having more influence over strategy. “There has been a sea change in investor behaviour – and the way company boards react to shareholder pressure,” said Edward. “Shareholders are all powerful. A 1% shareholder forced ABN Amro to sell up and a 3% shareholder effectively made Cadbury Schweppes break itself up.” Many shareholders have questioned why a company would have so much capital tied up in bricks and mortar, when all that cash could be lining investors’ pockets. This had led Mitchells & Butlers to consider a £4.5bn property JV with 15% shareholder Robert Tchenguiz. If the deal goes through, there is the tantalising prospect a £1bn-plus return for investors. It is a complex issue but ultimately, companies face greater pressure than ever to crystalise some of the value tied up in balance sheets, to the benefit of shareholders. This will continue to manifest itself through greater leverage, bond issues, opco-propco deals, and now possibly Reits. As my colleague Katherine Doggrell recently wrote, whatever happens, the deal machine will grind on relentlessly.