Property developer Lend Lease saw its shares edge above the pre-GPT bid level after it put out a ‘clarifying statement’ but the quality of its case will have
to improve

Call it a clarification, call it whatever you will but it seems Lend Lease is
losing the PR battle in its attempts to snuggle up and get all ‘stapled’ with
its property trust offshoot, General Property Trust.

A statement Wednesday announcing that Lend Lease “wishes to clarify
certain points’ regarding the merger proposal announced late last month, was
nothing than a restatement of what was said in the various documents and
letters issued on May 24.

Wednesday’s letter reiterated, rather than clarified, that Lend Lease would be
‘merging’ not taking over GPT, that GPT’s units would be stapled to Lend Lease
shares, and that the combined entity would be a property trust and listed on
the ASX in the Listed Property trust Index.

There was a big sell of the implied yield of 7.3% post any merger, which the
letter pointed out was what the GPT yield was prior to the deal’s announcement.

Well, yes, that was the May spin. Perhaps not in quite the same way, but Crikey
spotted it in the five page letter from Lend Lease explaining the mechanics and
the rationale behind its proposal.

Lend Lease let slip a BIG HINT to GPT unitholders, in its latest letter that
the combined company could be re-rated, with the implied yield falling as the
new security’s market price rose.

This re rating would be “based on the quality of the business mix and
liquidity and the growth outlook of the combined business”.
And there’s the rub in the whole proposal. It’s a pretty heroic assumption on
the part of Lend Lease to hint at a re rating post any merger solely based on
the ‘quality of the business mix and liquidity”.

There may be a case to argue that the outlook for the combined company might be
a little sexier for some investors with the development-orientated Lend Lease
operations in the business mix, but that’s about.

Where for example is the improvement in liquidity? The terms of the stapling
are 3.8 existing GPT units for every one Lend Lease share. Seems to Crikey
that’s an awful lot more GPT units listed and in the hands of investors than
Lend Lease shares.

Is Lend Lease really saying that because there will be a smaller number of
units on issue, then the attraction to investors will rise because the shortage
will nudge prices higher?Is this a slight misuse of the word ‘liquidity’ by
Lend Lease.

Investors in GPT, many of whom are small punters or retiree, look for stocks
with high levels of lquidity. It might mean steadier share prices, but it does
mean ease of exit and ease of entry without too much volatility.

Ahh, is that what Lend Lease is implying That the volatility might rise?

Lend lease’s claim of ‘the quality of the business mix’ is perhaps the real
issue. As Crikey noted when the deal was revealed – Is Lend Lease
having a ‘lend” of GPT

– there does seem to be some problems with Lend Lease’s recent history that
management still haven’t addressed.
Lend Lease remains esentially a property development-orientated business, with
its Bovis construction unit adding to that slant.

It’s still a big leap of faith for GPT unitholders who want a steady,
yield-driven income stream, to accept that Lend Lease has learned from its
failures of the past five since it sold the MLC to the National Australia Bank
for $4.3 billion.

Some unitholders are asking whether Lend Lease will do it again if it gets
control of GPT and fritters away the asset and income streams from the Trust’s
Australian properties in another abortive bid to be a global player in property
development, construction and services.
If you look at it from the GPT point of view, the trust will improve the
quality of Lend Lease’s business mix by contributing certainty of cash flows,
earnings and removing the distortions that the development industry creates
from ‘lumpy’ income flows.

There seems to be a feeling that the Lend Lease proposal does not reward GPT
unitholders for that particular contribution in any merged group.

From the GPT unitholders point
of view, the quality of their earnings and
income streams will not be as good if the merger proceeds. The
hope Lend Lease management has is that the new group will be re-rated
also
by the credit rating agencies such as Standard and Poor’s. If that
occurs, it
will be because of the boring cash rich base that GPT will introduce
into the
Lend Lease accounts.

Unitholders should forget all the talk from Greg Clarke and his mob at Lend
Lease about the wonderful future. Its the assets they own in GPT that will be
improving the future for Mr Clarke and his managers. Its the GPT assets that
will enable them to get big bonuses and high income and to avoid being taken
over or being down graded by the market because Lend Lease has run out of ideas
and money.

The latest letter from Lend Lease isn’t so much a clarification, its more of a
poor attempt to skate around the contribution GPT unitholders will be making to
the coffers of Lend Lease and the wallets of its shareholders and managers.

Lend Lease argues that GPT unitholders will end up owning around 59% of the
merged company, and Lend Lease shareholders the remaining 41%.

That’s true, but why then will Lend Lease’s existing management and board
remain in control. Surely GPT management and board, having done such a good
job, should get the majority of the top jobs?.

After all, the merged company will, if it happens, be a listed property trust,
and not a listed property developer. There is a big difference in mindset there. Or is this another example of corporate Australia’s penchant for having its
cake, grabbing yours and eating the lot?

Peter Fray

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