A year ago, developer and fund manager Mirvac was riding high, talking to Lend Lease about a merger that would have produced a property giant. The shares were trading around $6.30, and although the global economy was starting to darken as the credit crunch spread, optimism was high at Mirvac.

The merger didn’t happen and yesterday Mirvac had its hand out, dredging the market for money, $300 million of it, as quickly as possible. 

The shares were suspended at its request to allow a capital raising, one that will deeply dilute existing shareholders, including the big Middle East group, Nakheel and the Singapore Government’s GIC Real Estate, unless they decide to throw more money into the black hole.

Both foreign giants (Nakheel is run by former Sydney-based property player, Chris O’Donnell) bought into the company through connections: both are facing multi-million dollar losses: Nakheel’s stake of nearly 15% (the foreign investment limit is 15%) was assembled at an average $5.20; the GIC has 6.10% at prices cheaper than that, but above $2 a share, compared to the 98.5 cents at Wednesday’s close and the 90 cents a share suggested price for the placement being run by JPMorgan.

Market reports say the company is trying to raise $300 million of more to keep itself viable, The shares fell from $2.10 on October 21, to 98.5 cents on Wednesday at the close, when they plunged 28% in the day as rumours spread of an emergency fund raising. It took an ASX query to get the company to reveal that things were happening, and a bit of market digging to find out the details of the placement.

It joins the likes of basket cases, GPT, which is seeking up to $1.9 billion (with the GIC the major bailer out), the Goodman Group, possibly $1 billion or more and several smaller raisings.

Industry giant Stockland now looks even smarter in grabbing $300 million from the market three weeks ago amid the market turmoil.

Real estate sources say Mirvac has been hammering clients, getting them to complete all sales by today: its trying hard to boost sales for projects under development, such as the old Newcastle Hospital site in NSW where 50 of 140 apartments have been sold off the plan, and more are being pushed through today. It’s a hole in the ground and is now to be finished until 2010, but you’d have to ask will it if Mirvac needs $300 million and quickly.

Mirvac’s long term CEO, Greg Paramour has gone, just after a cut in distribution and a $400 million cut in asset values was revealed mid year. He told the market and the media that he had told chairman, James McKenzie, that he would be retiring. That was “late last year” in Mr Paramor’s words in July. But it was only disclosed months later.

In contrast, Lend Lease, its one time dance partner, was quick to brief the market in late August when it and CEO, Greg Clarke agreed that he would be finishing up. He’s not been sacked, he and the company agreed to a five to seven year relationship, and he’d decided to go early. Running a big property company, especially one with an international side like Lend Lease is tough.

But brokers noted the speed with which Lend Lease issued its statement about the CEO change and the seven months gap between the time when Mr Paramour told the chairman, and when news emerged of the CEO’s decision to retire.

In that time Mirvac’s share price had fallen more 60%, from around $6 to $2.

And then in the annual report the company’s board put its hand out for a $250,000 increase to $1.450 million half a million dollars a year in directors fees.

“The proposed increase will allow for some future increases in Board remuneration over time to reflect market movements and changed responsibilities. It will also reflect changes that have occurred since 2006 in the legislative and legal framework underlying almost every aspect of Mirvac’s operations. All of these factors, combined with the increased expectations of the community, governments and courts in relation to the role of public company directors, has meant directors need to commit an ever increasing amount of time and resources to their role.”

Seeing there was a $200,000 increase at the 2006 meeting, the $250,000 now being sought makes the $450,000 total increase a 45% rise from in that time. No wonder there is a rising level of community unease about corporate remuneration.

It’s not that the directors are on the breadline: chairman James McKenzie received a base salary of $382,000 in 2008 and the other non-executive directors received from $169,500 to $280,000, so there’s not much suffering there. Shareholders, especially the smaller ones, have lost far more than the management or the board have.

There was a rumour yesterday that Nakheel, the Dubai royal family’s development company, would attempt to privatise Mirvac. But even in oil rich Dubai, times are tough and the emirate is under growing financial pressures. The United Arab Emirates, of which Dubai is the most open, has been hit by the credit crunch, is supporting banks and other financial groups, and now expecting property prices to fall next year.

So its no wonder even the well connected Nakheel isn’t interested in bailing out Mirvac.

It’s a tough time for Mirvac chairman, James McKenzie. he’s not having a good credit crunch. His other boards are not doing well: Pacific Brands shares have plunged, as have those of Bravura Solutions and the James Packer Crown associate, Melco in Macau, where the shares have tanked.

Earlier this week, Merrill Lynch had this to say about Mirvac (its ASX code is MGR).

“Whilst MGR has only ~$100m of drawn debt expiring pre-2010, it has a $1,112m undrawn syndicated loan facility maturing in June 2009. Given MGR’s net capital requirements over the next 12 months (we estimate $330m) and the further credit rationing by lenders over the past 2 months, MGR is facing a material refinancing risk which may lead to an equity raising, in our opinion.

“In our report titled “Residential unwind” we have updated our outlook for the Australian residential sector and reviewed MGR’s residential business.

“Whilst (1) there remains a supply shortage, (2) affordability is improving with rate cuts, and (3) the buy-versus-rent equation is becoming more compelling, we believe these will be more than offset by lower income growth, rising unemployment and the de-leveraging of the household sector.

“We forecast total price declines of 10% (including the ~3% declines to date) over the next two years and volume declines of 10% in 2009.

“MGR’s ’09 guidance assumes development EBIT grows 13-21%, an aggressive forecast in the current market. We forecast a 15% decline in total development EBIT and an 18% decline in resi EBIT. In addition we expect a 25% erosion in MGR’s inventory value (driven by 10% price decline and 2 years of holding costs) over the next two years which could result in further inventory write-downs.

“We believe MGR will continue to trade at a significant discount to while debt refinancing/equity raising and earnings guidance risks remain.”

“We believe MGR will continue to trade at a significant discount to while debt refinancing/equity raising and earnings guidance risks remain.”

Not the most ringing of endorsements.

Peter Fray

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