danger ahead for centro ...

Source: www.businessspectator.com.au

Danger ahead for Centro
Robert Gottliebsen
5:36 PM, 8 Jul 2009

I can smell danger for Centro shareholders in the attempt by a group of shareholders to call an extraordinary meeting to appoint three new directors to the board.

Centro Properties is the most highly leveraged solvent property play in the world so there is scope to make or lose a fortune. So it was perhaps inevitable that it would attract entrepreneurs seeking to exploit the situation.

So let’s first explain how the leverage works and why the proposal carries so much potential danger.

On the Centro books is about $25 billion worth of shopping centres held in a complex web with lots of outside interests. The market capitalises the shareholders equity in the Centro Properties company at the core of that property portfolio at around $90 million. Currently the book value of shareholders funds is actually minus $350 million but there is about $1 billion of convertible debt held by some 18 banks which takes shareholders funds up to around $750 million. But right now that convertible debt is not shares, so it carries no votes.

Closely linked to the convertible equity is a $4 billion three-year loan by the same banks and not far away is a $US2 billion loan held on the syndicate of US shopping centres.

There is a clause in the loan agreements that says that if there is a material change in the company then the banks can pull the plug. Put the wrong people on the board and the management walks out the door and the highly leverage house will come tumbling down.

And there is going to be some nasties come Centro result time.

The company has warned that the value of its shopping centres has fallen further since December. I don’t know how far they have fallen but it may be more than 5 per cent which means a group paper loss of $1.25 billion – some of which will trickle down to Centro Properties and greatly erode shareholders funds. High leverage works both ways.

The holders of about 12 per cent of the equity have made series of proposals to the Centro board, none of which have come to much. The latest is that they should get a commission on dealing with China.

If that was accepted we would be rewarding one group of shareholders with board places and potential payouts. I can’t think of anything more likely to bring down the highly leveraged house.

If there is Chinese capital wanting to take out the banks and reconstruct the company then let’s do it the proper way. Determine whether the potential lenders are of substance and if they are they can sign a confidentiality agreement and have a look at the books. That does not require side deals.

If the board candidates have bank backing then let them put it all on the table. But you need more than $7 billion – $5 billion for the Australian banks and $US2 billion for the US loans.

These are big sums. Centro is a massive call option on the US and Australian shopping centre market. It was an amazing effort that it came together.

Centro shareholders should be aware of the dangers in any such play and the board challengers represent a danger to the whole exercise unless they come up with a well set out and well financed plan with no side deals.


Ends.

Cheers, Pie :)