cer holders must reject the merger

Hi johncme and others,

I had actually got the grand final result out of my head until I read your post :-)

While that was a loss I can accept (well barely..), the loss we are facing due to the proposed amalgamation makes me sick to the stomach.

I expressed my sentiments on here recently and nothing, absolutely nothing that the CER board has put forward has made me think "this may be in our besst interests".

The no I will be voting on the 22nd of November will be in UPPER CASE, BOLD and 72 FONT if you get my drift.

In addition to the points I raised here a month or so ago, why is it that the board fished around for a suitor for the US assets believing the sale price was in CER's best interests but a similar proposition has not been forthcoming for the Australian assets.

The US portfolio was valued at a cap rate of 8.28% as at 31 Dec 10 and was sold at a slight discount to book value on the 1st of March this year. Lets say it was a cap rate of 8.3%.

The Aust portfolio is valued at $1.72B as at 30 June 11. The cap rate was 7.29%. CER is trading at a 17.5c discount to NTA at the moment, which means its assets are effectively worth (17.5c x 2.3b shares) = $402m less than NTA.

This would mean that CER's properties are only worth $1.32b or a 23% discount to the current portolio valuation. This puts CER's effective cap rate at about 9.5%! This is significantly more than what the US portfolio was offloaded at!

The reality is CER's portfolio is still undervalued significantly compared to its peers and this is reflected in the higher cap rates and recent sales surpassing valuations (ie Centro Lismore)

In my opinion, the best way for CER to maximise its value for security holders is for the portfolio to be offloaded in its entirety.

2) There is alot of rubbish being pushed down our throats by the board about the dangers of not accepting the proposal. I worked in insolvency for a few years and the reality is CNP has been in a quasi receivership since December 2008 and in reality cannot deal with the sale of its assets without the consent of its lenders. Whether CNP goes into administration/receivership or not, changes absolutely nothing for CER.

The Receiver will continue to trade on CNP just like it is trading on now.

The secured creditors will take possession of CNP’s assets officially.

CER will continue to pay management fees to the receivers being the external administrator of CNP.

Basically it will be a very expensive exercise and it will all come out of CNP’s kitty. The receiver is the first in line to be paid before secured creditors or any stakeholder.

All this will cost alot and probably more than the $100m, CNP secured debt holders are willing to provide junior stakeholders, which I am sure is its incentive of conniving such a plan.

When this all comes to the receiver, CER can then come to the table and discuss a separation plan with the receiver. I know CER is effectively a subsidiary of CNP but CNP has 90 senior lenders and not all its interests will be aligned.

Also, any sale of assets by the receiver will be done properly of a commercial nature.

Some of the assets may need to be sold as some secured lenders may want to realise proceeds from their investment but this will lower our leverage assuming if sold even at a discount of less than 60%! (as CER’s leverage is currently 40%) Given the way Centro’s properties have been performing on the market of late, a good sales outcome should emerge.

With any decrease in leverage, we can offer to buy up an equivalent value in properties where we share half interests with CNP. I mentioned an asset swap as a possibility a month or so ago. This is another option the CER board has not explored.

The sale of Centro Galleria alone, which would attract interest from all major REITs, assuming if at market value ($307M CER value), would decrease the portfolio value to $1.41b and our interest bearing liabilities to $423M (From $730M post repayment of CMBS debt of $155M as at end of Sep 11). This alone would decrease gearing to 30%!
Also, if the plan is rejected, the 31 Dec 10 asset values all parties were looking to use as the amalgamation fair value will be null and void and we can start looking to a new and improved NTA value as at 31 Dec 2011..

CER has a current NTA of 44.5c. Having recapitalised after the US sale and having its gearing reduced to 40%, this is where CER should be trading. Its portfolio value should grow by NOI for this half year assuming cap rates are stagnant. It is interesting to note that ABR according to the supplemental released for 30 June 11 FY shows CER’s share of gross rent being $167M for the Aussie portfolio. In the supplemental 12 months back it was $137M. On a look forward basis, CER gross rent is 22% higher. This does not automatically translate to higher NOI as CER has to pay a certain percentage of new leases to the RE. As there are a few redevelopment properties in the CER portfolio, this will eventually translate into much higher NOI.

I could write another 10 pages on this as I am that fired up at the moment.

The repayment of the CMBS debt as announced on 30 Sep, resulted in a further 5 of CER’s assets becoming unencumbered. If CER managed to get financing with a leverage of 75% plus at the height of the GFC, a leverage of 40% with unencumbered assets would be the type of situation banks would love to get their teeth into especially when CER derives most of its revenue from non discretionary tenants. Yes there may be some assets that may need to be sold soon after as CNP may be in receivership...... but the financiers would have low exposures to CER’s share of assets anyway which should withstand any surprise on the downside.

What we have people is the most incompetent and disgraceful scenario I have ever witnessed since I have started investing in the share market.

Under no circumstances will this deal prevail. Even if it means CER goes into receivership itself, the upside for us will be substantially higher than this ridiculous amalgamation proposal.

It is disgraceful to think that we are taking a haircut on our NTA by agreeing on this proposal when the syndicates who are screaming for liquidity are entering into the new entity with no penalty over their heads.

CER’s gearing will increase from 40% currently to 43.4% and its debt will increase significantly to nearly $2b.

Dont even get me started to the vending of the syndicate business to the new entity. Have a look on page 41 of 53 of the presentation and see if theres anything wrong with some of the things that CER are paying for....

The EBIT of CNP’s management business directly from CER warrants a very low valuation. We are effectively subsidising the syndicates’ entry into the new entity.
What makes this even more puzzling is I was reading an article (see below), which claims properties will be sold post merger. Has the purchase price of the syndicate business taken into account planned asset sales? Has the CER board suggested that an asset sale occur prior to any merger?

http://www.theaustralian.com.au/business/property/centro-plans-1bn-asset-sale-if-merger-goes-ahead/story-fn9656lz-1226161600452

The whole charade is a disgrace. I have plenty more to go but we’ll continue perhaps tomorrow :-) I feel Ive missed out on many issues still!

My vote will be a NO and Im hoping every CER holder votes accordingly.

Im very much looking forward to the 22nd of November

Cheers