Published 22 June 2012
Metlifecare Ltd won 79% merger approval yesterday from its mainly institutional minority shareholders, after revising terms of the deal a second time. From a $108 million payout originally, it’s been cut to an $85 million deal.
Many of the small shareholders were new, brought in by a $40 million placement in November and a $59.2 million selldown of 23% of the company in December by majority shareholder Retirement Villages NZ Ltd – jointly owned by Queensland property developer FKP Ltd & Macquarie Bank Ltd of Sydney, and controlling 82% of Metlifecare – all at $2.10/share.
That was also the price in early May, when the 3-way merger was announced. At that price, the deal was at 55% of each participant’s net asset backing, putting a value on the deal of $108 million. The share price rose to $2.54 after the capital-raising last November, dropped back to $2.03 after the merger was proposed then climbed to $2.20 yesterday.
The merger is with an unlisted subsidiary of the Retirement Villages Group, Private Life Care Holdings Ltd, and Vision Senior Living Ltd.
In the first change to the proposal a month ago, the immediate payment to Vision shareholders was cut from 21 million to 13 million shares, but could have risen by 7 million shares in 28 months if the price then exceeded $3. Metlifecare also cancelled its proposal to pay Vision shareholders $10 million in shares (at $2.40/share) to repay debt.
After more negotiations, Metlifecare came out just before yesterday’s vote with a reduction to 10 million shares in the payment to Vision. And instead of raising $10 million from third-party investors to reduce the Vision debt, Metlifecare said it would rationalise its property asset portfolio.
Another announcement before the meeting was that Metlifecare expected its net asset value to fall 15-20% in the 6 months to 30 June, which would reduce its share price discount from 45% under the deal last month to 34% if asset backing is cut from $4.01/share to $3.20/share.
Managing director Alan Edwards said in that announcement that CBRE was carrying out the year-end valuation, and the company expected that recent transactions in the retirement village sector and wider economic activity would lead to changes in its discount rates & property price growth assumptions.
All a very mixed scene for a merger to be carried out in, and complicated for small investors to work out, but as it appeared they were getting an enhanced deal arising from the reduced payout to Vision’s shareholders (no change for Private Life Care), the small investors went for it.
In a run-around day, I arrived at yesterday’s meeting only in time to hear the vote read out. However, independent director and chairman of the meeting John Loughlin told me he was delighted with the outcome.
That’s not surprising, given all the changes improved the position of Metlifecare over those of the other 2 merger parties, and the merger itself would enhance Metlifecare’s performance.
In his address to the meeting, Mr Loughlin explained why he & the other independent director, Brent Harman, supported the merger: “We have recognised that a combination of mature villages, provision of care and an element of village development is likely to produce a more valuable organisation with stronger cashflows than a portfolio of mature villages.
“This is demonstrated by the financial performance & market recognition of other players in the sector. A merged company will have a portfolio with a greater development emphasis. We will be able to accelerate our development strategy and substantially reduce the operational risk of execution as the Vision business brings both an existing development pipeline and a capable, experienced development team.
“Vision alone would have probably overbalanced us towards debt-funded development and the Private Life Care component restores a comfortable, more prudent balance.
“My second reason is that the original transaction immediately increased our cashflow generated by 6c/share to 26c/share. The revised terms announced today increase this to an 8c/share increase, to 28c/share.”
Mr Loughlin believed operational synergies and delivery of the company strategy would enable Metlifecare to deliver improved cashflows, and therefore shareholder value, on an ongoing basis.
“It is true that a merger would increase the debt load of the business. Debt was originally projected to increase to $184 million, or 18.3% of residual assets less resident refundable deposits. Taking account of the revised transaction terms and the latest revaluation of our assets, the debt will now be at $202 million, but now is likely to represent around 22% of total assets less refundable deposits.
“This level of debt, while higher than current debt ratios, is still at prudent levels, is capable of being serviced from our improved cashflows and is similar to the ratios or our 2 listed competitors in the sector. It is important to recognise that completed new stock of units will have a value of $54.2 million and the sale proceeds of these will be used to pay down debt.
“In addition, this transaction is accompanied by a selldown of the shareholding of the major shareholder, Retirement Villages Group. This is also a significant change. Other factors that have impacted on the market perception of this company are that the register is tightly held, creating a lack of market liquidity and that the stock is ex-takeover.
“These impediments to market recognition will be removed by the selldown. Following completion of the transaction, the board will appoint additional independent directors, giving a majority of independents.
“On balance, I think this transaction opportunity has the potential to significantly change both the performance & market recognition of Metlifecare. The revised terms are even better.
“This view is also shared by the vendors of the Vision & Private Life Care businesses. They are not walking away with cash from this. They have locked in major shareholdings for the medium term. They are backing Metlifecare to deliver value through the merged business. They have exchanged their assets for shares at a substantial discount to net asset backing. They will only realise the valuation of their existing assets if Metlifecare succeeds and is recognised by the market as having succeeded.”
The merger is subject to various conditions, including Overseas Investment Office approval, with settlement due in late July. Next up will be the Retirement Villages Group’s selldown of shares.
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: Company release, meeting speechnotes, story written by Bob Dey for the Bob Dey Property Report.