people's republic of centro ...

Source: www.businessspectator.com.au

People's Republic of Centro
Commentary
7:06 AM, 26 Mar 2009
Alan Kohler

Something strange and unexpected is taking place in Centro Properties Group – a Chinese uprising. Or is it a Chinese takeover?

A group of Chinese investors has bought 18 per cent of the company and is still buying. They plan to vote against the so-called debt stabilisation plan announced in January, which would give Centro’s 24 banks 90 per cent of the equity and dilute existing shareholders back to 10 per cent.

They call themselves the CNP Shareholders Association, but are in fact a group of Chinese investors in Sydney and Hong Kong connected to Li Zhang and Margaret Lou, two Sydney-based Centro shareholders.

A Centro spokesman told me yesterday the company is in a “constructive dialogue” with the group, and that chairman Paul Cooper and managing director Glenn Rufrano met with Li Zhang and Margaret Lou two weeks ago. They were due to have another meeting yesterday, but I don’t know whether that meeting took place.

Lou and Zhang are also lobbying the federal government against the debt stabilisation plan and are now trying to involve the so-called Rudd Bank – or the Australian Business Investment Partnership, which was set up with a capital base of $4 billion to lend to commercial property.

On February 13, the CNP Shareholders Association lodged a substantial shareholding notice for 11.78 per cent of Centro, saying the CNPSA was a non-profit organisation in which the members had agreed to vote together. “Therefore, we believe we became a substantial shareholder of Centro Properties Group…”

That shareholding is now up to 18 per cent, but no further substantial shareholding notice has gone in. When I asked Li Zhang yesterday why not, he said the other 6.22 per cent were not as tightly knit as the first group and had just agreed to vote against the debt plan.

Perhaps this also has something to do with the fact that they are approaching the takeover threshold of 20 per cent. Ensuring that future purchases don’t require substantial shareholding notices because they are not connected closely enough would mean they could go over the 20 per cent without making a full bid.

Li Zhang said members of the group were continuing to buy shares and would try to defeat the plan that was agreed with the banks in January. An extraordinary general meeting must be held sometime before 2015 to approve the deal (a 50 per cent vote is required), but the company has said it will be this year.

Li Zhang told me the group consists of “many friends and relatives, and they are all very unhappy...Australia is a fair country, but how is losing 90 per cent of your equity fair? We are hoping the Rudd Bank will consider a loan to Centro of $1.05 billion to replace the banks".

The problem is that although the hybrid securities that were given to the banks in January, and which convert to 90 per cent of Centro’s equity, amount to $1.05 billion, total debt is $4.95 billion. The other $3.9 billion was extended for three years as part of the agreement.

If the agreement is voted down by shareholders, the full amount will be due and payable. If it were not paid, the banks would appoint receivers and more than 750 shopping centres would come on the market in Australian and the United States.

If that happened, not only would the shareholders end up owning 100 per cent of nothing, but also the commercial property markets in both countries would be devastated.

The Rudd Bank (and its chief executive Ahmed Fahour), would suddenly be overwhelmed as prices crashed and shopping centre owners across the country – large and small – breached their debt covenants.

All shopping centre owners would be at the mercy of their banks because loan to value ratios would crash.

The Australian Building Investment Partnership’s initial capital of $4 billion, shared by the government and Australian banks, is expected to be geared 6 to 1, so $24 billion may be available for commercial property loans. Centro’s $5 billion would be a fair chunk of that.

If Centro shareholders vote down the debt plan, someone will have to come up with that money to prevent a calamity on both sides of the Pacific. Will it, in fact, end up being another Chinese takeover – another tricky decision for the Treasurer Wayne Swan?

The February substantial shareholding notice from the CNPSA actually listed the individuals and companies who together owned 114,279,800 Centro shares: they are all either Chinese names, or companies based in Hong Kong.

Just what Li Zhang and Margaret Lou and their supporters hope to achieve is not clear, but they are very serious.

Li Zhang insists the CNPSA is simply a non-profit association of like-minded shareholders, but at the meeting two weeks ago, they told Paul Cooper and Glenn Rufrano that they had toured the United States and inspected 127 of Centro’s shopping centres.

That has helped convince Centro management that the group may have more substance than first thought. Why else would you visit 127 US malls, unless you were a special kind of masochist?

Are there Hong Kong or mainland Chinese investors standing behind the CNPSA with $5 billion? Li Zhang and Margaret Lou don’t strike me as naïve people sailing oblivious towards failure. They know what the stakes are and the idea makes some sense.

Centro Properties Group is basically a portfolio of 665 shopping malls across America. It’s not hard to think this would be of some interest to Chinese exporters wanting direct access to US consumers.

But no doubt that is seeing a old-fashioned xenophobe's 'yellow peril' where none exists. The CNPSA, Li Zhang and Margaret Lou should probably just be taken at face value: an attempt to persuade the Australian government to rescue Centro shareholders from a 90 per cent dilution.


Ends.

Cheers, Pie :)