Published 8 June 2012
The independent appraisal report on the Metlifecare Ltd merger continues the offer of hope for improved performance & majority owners’ management, perhaps this time with the substance that hasn’t existed since Macquarie Bank Ltd and Brisbane-based FKP Property Group were thwarted in their 2005 attempt to take over the listed retirement village operator.
The Australians set up a 50:50 joint venture, Retirement Villages NZ Ltd, as their ownership vehicle, which Macquarie exited in January.
Retirement Villages NZ held 82% of Metlifecare until a selldown at the end of last year, which reduced the holding to 51%. An unlisted subsidiary of the Retirement Villages Group, Private Life Care Holdings Ltd, is the second party to the merger and Vision Senior Living Ltd is the third.
The Retirement Villages Group will get its holding down to 41-45% of Metlifecare once the merger & related transactions are complete, and the small group of non-institutional retail investors, currently only 4% of the register, should increase substantially.
The appraisal, by Northington Partners Ltd, warns that if the merger doesn’t proceed, the Retirement Villages Group’s shareholding overhang could be sold off anyway, depressing the share price.
Northington Partners concluded this week the merger terms were fair to the Metlifecare minorities, but the merger’s really about FKP’s desire to lift a non-performing investment’s performance, for which it needs to reduce its own stake, an opportunity for Goldman Sachs to exit Vision and the desire of new bankers to ensure the structure they have lent to is well balanced for growth in a way that it hasn’t been for 7 years.
Metlifecare’s minorities will get to vote on the merger proposal on Thursday 21 June. Settlement is intended to happen on Monday 2 July, assuming all conditions (including Overseas Investment Office approval) are met.
Independent directors Brent Harman & John Loughlin noted in a letter to shareholders yesterday that, in their opinion,” the transaction represents an ideal opportunity for Metlifecare to acquire assets which offer a good strategic fit, and offers a number of attractive benefits for Metlifecare, including the following:
an enhanced platform for Metlifecare to drive growth & shareholder valuecomplementary village portfolios in premium locations, as well as a strengthened presence in the important Auckland market, andaccess to strong development expertise & property suitable for development.
Northington Partners partly linked Metlifecare’s failure to have those drivers in place, and its worse performance than competitors Ryman Healthcare Ltd & Summerset Group Holdings Ltd, to the global financial crisis. Macquarie & FKP had loaded their investment vehicle with so much debt that, having been thwarted in the full takeover, they were unable to support the target company to the extent they ought to have.
The appraisal report said: “From a high of $8.25/share prior to the impact of the global financial crisis, the Metlifecare share price fell to a low of $1.38 in March 2009 before settling into a trading range generally between $2-2.40 over the last 12 months.
“Metlifecare shares have also consistently traded at a significant discount to the value of its net tangible assets since the global financial crisis, in contrast to both Ryman & Summerset, which have both been consistently trading at a premium to NTA.
“Although the Metlifecare discount to NTA can be attributed to a combination of many factors, we suggest that the key historical factors relate to the market’s perception that Metlifecare has limited development opportunities, a lack of industry-experienced development skills, a weak balance sheet (prior to the 2011 capital restructure) and limited flexibility due to Retirement Villages NZ’s controlling shareholding position.”
While the merger is a neat way for FKP to combine 2 New Zealand assets and for Goldman Sachs to exit Vision (which it’s able to force whether minority shareholder Arrow International Ltd likes it or not), Northington Partners said it was “unlikely that Metlifecare could grow its asset base to the same degree by acquiring appropriate assets from other third parties for cash consideration, even assuming the cash resources were available”.
Metlifecare shares have been trading down at 50-55% of the $4 net asset backing, which suggests management & structure are the primary causes of poor performance. The crucial issue for the minority shareholders – either hoping to exit as the result of a price rise or to remain invested in a better performing stock – is less about the fairness in present NTA terms, more about likely performance.
Northington calculated that under 3 headings: Strategic scale, Auckland market coverage and access to development opportunities & expertise.
It said the merged entity would be 35% larger than the current Metlifecare business: “Management expects that it will be able to extract a number of scale efficiencies from the larger entity which will ultimately improve profitability.
“Metlifecare will expand its Auckland portfolio from 7 to 12 developed villages, and thereby enhance its existing network from which to cater for strong expected future demand in New Zealand’s key market.
“Metlifecare has a limited land bank, few existing development opportunities and limited in-house development capabilities. The acquisition of Vision provides immediate access to property suitable for development, together with an experienced development team…..
“Even though we believe that the full potential benefits are likely to be realised over the medium to long term, the proposed transaction is expected to be considerably cashflow accretive for Metlifecare shareholders over the next financial year.”
9 May 2012: Metlifecare deal at 55% NTA
9 March 2012: Metlifecare secures new funding facilities
20 February 2012: Lift in property values boosts Metlifecare
13 January 2012: Macquarie exits Metlifecare fund management
14 December 2011: Metlifecare gets 70% takeup from small investors
8 November 2011: Australians’ Metlifecare sell-off succeeds at 54% of entry price
4 November 2011: Australians offer to cut Metlifecare stake with 2-pronged offer
On the move, January 2010, Vision Senior Living recapitalisation follows Bourke’s departure
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Attribution: Appraisal report, independent directors’ letter, story written by Bob Dey for the Bob Dey Property Report.