Redefine-Fountainhead deal completion faces delay

Plans by South Africa's second largest property fund, Redefine Properties to put Fountainhead Property Trust's R11,1 billion portfolio under its control faces some delay in its endeavours.

This year Redefine will not be able to close the planned acquisition of the property portfolio which includes sought-after shopping centres like Centurion Mall in Pretoria, Blue Route Mall in Cape Town and Benmore Gardens in Sandton.

Reports suggest that the takeover may take at least another 12-24 months before Redefine achieves its ultimate goal.

Early this month Redefine announced plans to acquire an additional 250 million participatory units in Fountainhead as it tries to grow its stake from 49,6% to just over 70% through a share swap offer.

Redefine proposes an offer that consists of 110 units of Hyprop Investments for every 1,000 units of Fountainhead.

But Redefine CEO Marc Wainer says it looks as though the company will end up with only about 40m more units, which would take Redefine's holding in Fountainhead to 53%.

Last year, Redefine's buyout attempt was derailed by sector rival Growthpoint Properties, which entered a competing bid for Fountainhead's assets. The hotly contested battle dragged on for six months. In the end, both offers were withdrawn but Redefine, which at the time already owned Fountainhead's management company, acquired 49,6% of Fountainhead's units instead.

Redefine's current proposal, which opened on October 2 and closes on October 18, unless it is withdrawn earlier, offered Fountainhead shareholders 110 Hyprop units for every 1000 Fountainhead units. In accordance with the Companies Act, the offer is open only to shareholders with at least 135000 units, which equates to a value of just over R1m at the current share price.

Wainer ascribes the subdued interest in Redefine's latest share swap offer to the fact that most institutional investors, which typically would own more than 135000 Fountainhead units, had already participated in Redefine's initial share purchase. "And most of the bigger investors are probably already full on Hyprop."

Evan Robins, head of listed property at Old Mutual Investment Group SA, agrees. He says unit trust fund managers who still own Fountainhead units may already be at their legal maximum as regards their Hyprop holdings.

Nor, says Robins, is Redefine's share swap offer attractively priced enough that it would sway investors who believe Fountainhead has inherent long-term value. Nevertheless, Wainer says the plan is to acquire Fountainhead's assets, though the process might take longer than hoped. "We still want Fountainhead's assets but that will probably only materialise a year or two down the line. We will have to see how it plays out."

For now, Redefine will try to cash out its remaining Hyprop shares. "We have had interest from a few big investors who want to buy our Hyprop stake. But we won't dump our shares on the market."

Wainer says once the Hyprop stake is sold, Redefine may come back with a cash offer to the remaining Fountainhead unit holders. "We will revisit this option in the new year. For now, it makes no difference whether we own 50%, 60% or 70% of Fountainhead's units as we are already the largest single shareholder and own its management company."

Meanwhile, it appears that Redefine's restructuring efforts to turn Fountainhead around are beginning to gain traction. Some of its properties were badly neglected which weighed on Fountainhead's income growth performance in recent years.

CE Len van Niekerk, who was appointed in June, says Fountainhead is now on track to begin a new phase of sustainable long-term growth in income payouts. "Management has embarked on several development, disposal and acquisition initiatives, which should significantly improve the quality of the portfolio over the next few years."

Van Niekerk expects Fountainhead to return to market-related income growth of between 6,25% and 7,25% for the 12 months to August 31 2014. That will be a welcome turnaround on the 2% drop in distributions reported last week for the 11 months to end-August this year. The 11-month reporting period is a result of Fountainhead changing its financial year-end from September 30 to August 31.

Sesfikile Capital director Kundayi Munzara says though Fountainhead's drop in distributions is within management's guidance, it is slightly below expectations. He says Fountainhead is poised for a recovery once the backlog of refurbishments and redevelopments is worked through. "But investors shouldn't expect a significant turnaround overnight."