Centro Seeks Shareholder Support to Avoid Liquidation

Centro Properties Group (CNP), the mall- operator on the verge of insolvency, will learn today if a last- minute sweetener offered to shareholders will win their support when they vote on the company’s restructuring plan today.

Debt and equity holders of Centro Properties and Centro Retail Trust, the real estate investment trust it manages, will vote on a proposal to combine the group’s multiple funds and syndicates into a single A$3.4 billion ($3.4 billion) entity that will be largely owned by its major creditors.

The Melbourne-based group’s attempt to salvage the business after selling its U.S. malls to Blackstone Group LP in March faced likely failure when some of Centro Retail’s biggest shareholders signaled they would vote against the plan. The company on Nov. 18 offered Centro Retail shareholders a bigger piece of the new trust, and significantly reduced the fallout for them from ongoing litigation.

“The revised terms are a lot more favorable to Centro Retail unitholders,” said Antoinette Plater, senior portfolio manager at Colonial First State Global Asset Management. “This move results in an improved net asset value for Centro Retail unitholders, as opposed to a dilution. So that will definitely improve the prospects of the plan being approved.”

Centro Retail shares surged as much as 28 percent, the most in two-and-a-half years, to 32 Australian cents yesterday when they resumed trading after being halted for the announcement of the improved proposal. Centro Properties shares jumped as much as 14 percent.

Revised Plan

The sweetened plan, which reduces the amount senior lenders are owed by about A$90 million, will increase Centro Retail’s net tangible assets to 44.4 cents from 40.6 cents under the earlier plan.

It will give them one new share for every 5.29 securities they currently own, compared with 5.8 shares under the earlier plan. It also reduces the maximum shares or cash investors in Centro Properties and its unlisted funds can receive to compensate for potential payouts from an ongoing class action lawsuit against Centro Retail. That amount is now capped at 6.91 percent of the new shares on issue compared with 20 percent under the initial plan.

Simon Marais, managing director of Orbis Group, the fourth- biggest investor in Centro Retail with about 3 percent of shares, yesterday said the fund manager will support the revised proposal. The boards of Centro Properties’ funds and independent expert Grant Samuel & Associates Pty on Nov. 18 also urged shareholders to vote in its favor.

Rejection Implications

A rejection by shareholders of Centro Retail, the healthier part of the company with more than A$1 billion in equity, would derail the group’s plans and return “to the situation we’re in today, which is an unsustainable situation,” Centro Chief Executive Officer Robert Tsenin said on the Australian Broadcasting Corp.’s Inside Business program Nov. 13.

In such a scenario, Centro Properties, which had A$1.3 billion of negative equity as of June 30 and A$2.9 billion of debt maturing on Dec. 15, would be insolvent, the company said in a statement dated Oct. 20.

Centro Retail “is likely to remain solvent, subject to its ability to meet its debts as and when they come due” if the restructuring doesn’t go ahead, Ian Randall, research analyst at Deutsche Bank AG, who initiated coverage of the stock with a “hold” rating on Nov. 17, wrote in a report on the day.

Still, there would be a significant degree of uncertainty regarding Centro Retail’s ability to either continue to trade as a going concern on a standalone basis or to realize book value for its underlying assets, Randall said in the report.

Success

If the vote succeeds, senior lenders, who rank above other creditors in the event of a default, will own 72.3 percent of the new Centro Retail Australia in exchange for the debt coming due next month, Centro Properties said. Shareholders of Centro Retail will get 15.9 percent of the new company, and investors in the unlisted Direct Property Fund will own 11.8 percent, the group said last week.

Centro Properties investors, who won’t participate in the new entity, will get 5.03 Australian cents for each security they own, for a total of almost A$49 million, the company said. Holders of hybrid securities will receive A$20 million and convertible bondholders A$21 million, it said. The rest will be set aside to pay other non-senior debt.

Centro Retail’s portion of the trust’s net tangible assets will be 44.4 cents a share, compared with 40.6 cents under the initial plan, and 44.3 cents as of June 30, according to the company’s announcement last week.

The new Centro Retail Australia fund, with net tangible assets per security of A$2.35, is expected to begin trading on the Australian stock exchange on Dec. 14, the group said Oct. 7.

Restructuring Plan

Centro Properties first announced a restructuring in 2009 after Chief Executive Officer Andrew Scott led the company in a debt-fueled, $9 billion U.S. buying spree. The move, intended to raise management income and accelerate profit growth, backfired when the global financial crisis caused property values to plummet and borrowing costs to soar, leaving the company unable to refinance its ballooning debt.

Attempts since then to raise enough capital to repay the debt had been largely unsuccessful, and Glenn Rufrano, who took over from Scott in January 2008, stepped down two years later to be replaced by Tsenin.

Blackstone Group LP, the world’s largest private-equity firm, in March agreed to pay about $9.4 billion to buy the group’s 588 U.S. shopping centers, at a 1.3 percent discount to their value as of Dec. 31.

At that time, Centro also agreed with holders of about 73 percent of its liabilities, mostly hedge funds who had bought its debt from banks, to swap the debt for its Australian malls, and started on the road to consolidating its listed trust, unlisted funds and syndicates into one entity.

Centro Properties has lost A$8.4 billion in market value since May 2007, according to Bloomberg data. Centro Retail’s market value has dropped A$3 billion since October 2007.

Centro Properties returned to profit, posting net income of A$2.7 billion in the fiscal first half, while Centro Retail reported a A$357 million profit for the period.

To contact the reporter on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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