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Covent Garden Landlord's Split Seen Creating Two M&A Targets

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  • U.K. firm may be divided into a landlord and a homebuilder
  • Landlords are trading at discounts to value of their assets

Covent Garden

Photographer: Rob Stothard/Getty Images

Splitting up Capital & Counties Properties Plc, the poster child for London’s two-tier property market, may just create two takeover targets instead of one.

The company is considering dividing itself into a landlord that owns much of the Covent Garden neighborhood and a developer with land holdings in the Earls Court district. One or both of the resulting publicly traded companies will be bid targets, according to analysts.

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The plan follows prolonged speculation about a takeover of the company, which trades at a big discount to the value of its assets. Olayan Group, Blackstone Group LP and Berkeley Group Holdings Plc were reported to be weighing bids for some or all of the company over the past six months.

“The proposed demerger is a defensive move against bidders trying to get to CapCo on the cheap, as showing the embedded value of the separate businesses increases the price any bidder would have to pay,” Green Street analyst Hemant Kotak said in an email. “If Earls Court still trades at a large discount, then it may remain a target.”

While the plan still isn’t final, CapCo said in a statement on Thursday that Chief Executive Officer Ian Hawksworth would lead the Covent Garden-focused company while managing director Gary Yardley would run the development business if the split proceeds. The stock was up by 2 percent in London trading as of 11:02 a.m. The landlord has declined 5.7 percent this year.

Changing London

London’s property market is in flux, with overseas demand for investment properties keeping values high in areas like Covent Garden while the residential market slumps. CapCo cut the value of the Earls Court housing project by about 12 percent this year as home prices fell across the capital and the development faced political protests. The company had written down the value of the holding by 20 percent a year earlier.

Covent Garden, the shopping and leisure district in London’s West End, is the more likely part to draw a bid because “it is a world-class retail destination,” Numis analyst Robert Duncan wrote in a note to clients after the possible demerger was announced.

Investors are discounting real estate firms below the value of their assets amid fears about the impact of Brexit and the risk of development. CapCo’s Covent Garden estate was valued at 2.5 billion pounds ($3.3 billion) at the end of December, while Earls Court was valued at 759 million pounds following the sale of an office building and the writedown. The firm’s market value was 2.5 billion pounds before the potential split was announced.

Clear Split

Recent sales of investment property at Earls Court have paved the way to divide the company “since it leaves two clear businesses,” Bloomberg Intelligence senior analyst Sue Munden said. “They have very different requirements and risks, so the split should enable them both to flourish.”

A demerged Earls Court-focused business would probably develop the estate in stages with separate partners for each part, as the company’s only funding would come from residential sales, Munden said.

The firm’s chairman, Ian Durant, who supports the board’s decision to consider a demerger, is to leave the role after eight years. Henry Staunton, the current senior independent director, will replace him.

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