CPPIB Partners With Dexus in A$2.7 Billion Office Fund Bid

Dexus Property Group, Australia’s biggest office landlord, and Canada Pension Plan Investment Board made a A$2.7 billion ($2.55 billion) bid for Commonwealth Bank of Australia’s listed office trust.

The cash-and-stock offer values Commonwealth Property Office Fund at A$1.15 a share, in line with yesterday’s closing price, Dexus and CPPIB said in a statement to the Australian stock exchange. Dexus is also offering Commonwealth Bank an undisclosed sum for the fund’s management rights, it said.

The purchase would give Dexus control of a quarter of the buildings in Sydney, the nation’s largest city, and further its goal of expanding funds under management. Toronto-based CPPIB, which already has C$5.8 billion ($5.6 billion) of investments in Australia, would gain more high-quality commercial buildings in the nation’s largest cities with Commonwealth Bank, the Australian government and AMP Ltd. as the biggest tenants.

“I’m happy to see a third-party provider of capital alongside Dexus, because they didn’t have the firepower to do it on their own,” said Stuart Cartledge, Melbourne-based managing director at Phoenix Portfolios. Dexus will also “get the benefit of asset management fees” while only paying 50 cents for every dollar of assets.

The offer price is equal to the value of the fund’s net tangible assets as of June 30. Commonwealth Property Office shares rose 3 percent to close at A$1.19 in Sydney compared with a 1.6 percent gain for the benchmark S&P/ASX 200 Index. Dexus shares climbed 1.9 percent to A$1.06, and Commonwealth Bank shares advanced 2.2 percent to A$72.32.

Strong Position

While tenant demand for offices across Australia has weakened, a lack of building during the global credit freeze has kept supply in check. Office completions in Australian city centers will be 30 percent less than the historical average over the next 10 years, Tim O’Connor, Sydney-based head of office leasing at property broker Jones Lang LaSalle Inc., said in a statement last month.

Dexus in July agreed to acquire a 14.9 percent interest in the Commonwealth Property Office Fund at A$1.1334 a share, after Commonwealth Bank said it was seeking to exit its real estate business. The bank proposed at that time that its three real estate funds, including the office trust, set up their own management teams, a process known as internalization.

“A rival bid is unlikely, though competitive pricing tension will likely come from Commonwealth Property’s imminent internalization,” Simon Scott, Sydney-based managing director at Moelis & Co., wrote in an e-mailed note to clients. “We estimate A$1.21 is the best that could be hoped for” in any possible higher offer from Dexus in the absence of a rival bid.

Proposal Considered

Dexus and CPPIB are offering 68 Australian cents and 0.45 Dexus shares for each Commonwealth Property Office share, according to the statement. The proposal would give Sydney-based Dexus and CPPIB equal stakes in the office fund and boost the Australian REIT’s office assets under management to A$11.5 billion from A$7.8 billion. Its third-party funds under management would climb to A$8 billion from A$6.1 billion, it said.

“We’ve had initial discussions with the responsible entity and they’ve been positive,” Darren Steinberg, chief executive officer of Dexus, said in a telephone interview. “The proposal that we’ve put forward is attractive and compelling to CPA unit holders against any proposed internalization. The costs involved with any internalization would leave the CPA net tangible assets at A$1.11 to A$1.12” a security.

Commonwealth Management Investments Ltd., which manages Commonwealth Property Office, will consider the offer “and any other alternate proposal for CPA that may emerge,” CMIL said in a statement to the stock exchange. CMIL’s independent board committee is being advised by UBS AG.

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