business spectator article

Morning all. I have deliberately taken it easy for a couple of days to focus on some other things, but now I'm baaacckk.

I just wanted to put some comments on the Business Spectator article from Gottliebsen which came out this morning.

There hasn't been a whole heap of comments on this, which I was surprised about and I'm concerned that some may not actually understand what he is saying. If you do, please ignore this post. If not, read on...

This could actually be a bit of a landmark commentary by Gottliebsen, depending on whether or not he came up with the idea. If he got it from someone close to the action, then it is significant. If he just came up with it in a flash of 3:00am inspiration because he holds some units in one of the syndicate, then it 'aint.

First, a brief review of the facts so far:

Waaay back, the company outlined 3 options: equity injection, sale of CAF (the US wholesale fund), sale of CAWF (The Aus wholesale fund). To their credit, they have stuck to this all the way through - no fire sale, no panic.

The week before last, when Uncle was doing the newspaper rounds, we got two key pieces of information: firstly, the banks were NOT (repeat not) putting pressure on Centro to fire-sale. Secondly, CNP realised that high-quality, individual properties in CAWF were easier to sell than the whole fund. If you refer back to the 1/2 year results Q&A session, you'll hear that the company had "literally hundreds" of calls for individual properties and "could sell them within a week".

Because the company has outlined and stuck to the three option strategy, we'll all understand how important it is (for credibility) that any deviation, like the break-up of CAWF, needs to have very careful communications associated with it. We are not dealing with a basket-case like AFG here. Note also that it seems like the banks realise the Centro services business is a cash-cow and don't want to do anything to destroy this.

It is also worth pointing out that Centro has a history of taking on significant debt to purchase assets. That's right, significant debt. Check out some of the company presentations last year to see details and commentary on this.

The business model was to borrow a stack of cash, purchase assets and then spin them off with outside equity into funds or syndicates. The outside equity was used to pay down some of the debt to more manageable levels. For those of you who are new to Centro, it's worth noting that this borrow-acquire-spinoff-repay cycle was a core competency of the company and worked well for a long while. It allowed Centro to recycle assets but retain part-ownership and management rights.

Where it all went wrong is that they had borrowed heavily just prior to the credit crunch and drop in asset prices. The rest you know.

So, today we have a company that (based on CEO comments) seems almost likely to get a debt extension, no pressure from the banks for a quick sale, a realisation that the high quality assets WITHIN CAWF would be the best candidates for sale and a commentator suggesting that a syndicate approach may be on the cards.

Now, if Gottliebsen came up with this himself and we see no mention of it from the company, we can let it go. But he does say

"I must emphasise that all these matters in the very earliest stages of evaluation..."

Which may indicate he has got word that they are being considered.

This being the case, it's genius and IMO very positive.

Centro would be able to offload the quality assets into syndicates, get 50% external investor equity from the already-interested parties (of which the company has confirmed there are many), pay down the debt with the proceeds and importantly retain management rights.

The banks get debt in CNP paid down, security over the assets in the syndicate and allow the properties to be managed by the cash-cow services business.

I have absolutely no doubt we are going to see a debt extension in the next couple of days. There are going to be myriad other parts to the announcement as well around such things as corporate governance, business structure, etc. But I would emphasise that if we see the above model put into practice, it will be (IMO) the most positive indication of the long-term viability of the company we have seen to date.