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04 April 2012 23:15

Oasis opposes Redefine plan to acquire Fountainhead: Hassan Motala (Oasis) & Marc Wainer (Redefine)

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Alec Hogg is a writer and broadcaster. He founded Moneyweb

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    The proposed acquisition hits a significant snag.

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    ALEC HOGG: A battle royal is in the offing over a company called Fountainhead Property Trust. Fountainhead is an R8.5bn business. It is in the sights of Redefine, which is 2.5 times bigger. But at least one shareholder doesn’t like the deal, and that’s Hassan Motala, who’s the senior analyst at Oasis Asset Management.
        Just by way of background, Hassan, you guys have got quite a  proud record coming out in coming out and in against proposed takeovers. In 2008 you were leaning the defence of the AVI proposed offer. That was at R24; today it's double that share price. An even bigger win was when you opposed Energy Africa’s acquisition and managed to get a move there into Tullow, which has been a 1500% uplift since 2004. Do you think you might have a similar result in this instance, or are you just looking for a better price?

    HASSAN MOTALA: I think importantly if you look at our style and how we've managed money for clients, our focus has always been to create value for them over the long term, and I think where we don’t see value being created in terms of opportunistic takeovers by certain companies, we obviously make sure we are quite vocal and aggressive about it. And I think, as you’ve highlighted previously, we've been fairly successful in opposing many takeovers. And I think in this case as well. If you look at it, we think that firstly the structure of the deal and also at the same time as a Fountainhead shareholder it's really dilutive from our perspective.

    ALEC HOGG: You do list a whole number of reasons why you don’t like the transaction, but I guess primarily among these is that you don’t really want to get the Hyprop paper that is being offered for Fountainhead?

    HASSAN MOTALA: Sure, I think importantly you’ve got to take that into account. As a Fountainhead shareholder you are looking at Hyprop trading at 6.7% dividend yield, so I think just from that perspective you are looking at getting more than 10% lower yield just on the Hyprop shares itself. So I think from that perspective it's already dilutive as a Fountainhead shareholder. Importantly as well we've got to look at it that you’ve got a company in Fountainhead which has had a very good track record in terms of investing in their core assts, and I think that’s what many market analysts and the like don’t tend to look at – that they’ve invested in the core assets, yes, they’ve had a bit of a slowing in distribution growth in the last few years, but they’ve spent huge amounts of capex – R850m in this Blue Route Mall, and we think that with the gearing they are relatively lowly geared as well. Interesting you look at their gearing level currently at 12 – yes, it may increase a little bit, but I think still relative to a Redefine or a Hyprop they are a lot lowly geared. And essentially you are swapping from a quality, low-risk to a expensive high-risk company, and I think … the deal structure itself in principle doesn’t make sense.

    ALEC HOGG: Hassan, what percentage do you have in Fountainhead?

    HASSAN MOTALA: We haven't a significant shareholding, but it's probably around 1%.

    ALEC HOGG: So it's only 1%. Do you think you'll be able to garner enough support to get this deal thrown out?

    HASSAN MOTALA: Sure. I think obviously at the end of the day we are sort of working in the best interest of our shareholders, and I think by issuing this release we've made our point. But I think obviously as you’ve noted previously, we try and make sure that we drive and try and realise the best value for our shareholders.

    ALEC HOGG: Marc Wainer is the chief executive of Redefine, and he joins us now. Marc, you’ve heard what Hassan has to say. We did send you the statement from Oasis earlier today. Does it come as a surprise to you to see this opposition?

    marc wainer: Hassan as a shareholder is obviously entitled – he is criticising a deal and quite honestly I don’t know what the final parameters of the deal are. We made it perfectly clear that our first stage is buying the management company. Only then are we going to be able to have access to the books of the trust and formulate an offer. That will probably be, in terms of timing, July/August of this year. So we don’t know what the landscape will be, we don’t know what share prices will be, etc. I do take Hassan’s point, though I don’t agree with – if you look at forward yields for the 2013 year, yes, certainly there is a lower yield on Hyprop, but probably higher growth. And quite honestly if you ask me at this stage what is the component, is it going to be 10% of the purchase price in Hyprop shares or 40% – I don’t know at this stage. So I can't tell Hassan today what the dilution is. But what I can tell you is that the numbers which we've got – and Hassan, we will be coming to see you in Cape Town next week, because we only started seeing unit holders today to give them our vision – but probably we are looking at maybe a cent dilution to Fountainhead’s unit holders overall, but substantial capital growth. So if one takes Hassan’s points – OK, let’s just talk about the balance sheet, OK? If you look – and we've had the opportunity of doing due diligence on the management company – by June or July this year Fountainhead’s debt will be around about R2.5bn to R2.9bn, depending. There’s one transaction which has got some conditions precedent to be fulfilled by the end of June – if that happens it's R2.9bn, if it doesn’t it's R2.5bn. That’s about 25% gearing. Redefine is 32%. Combined they’ll have 29%. So you are working off a balance sheet where they show 12% or 13% gearing. That's no longer the case. They had to fund Blue Route, the acquisition of the 25% of Centurion, etc.

    ALEC HOGG: Marc, without getting into details, because I know that shareholders would be interested but for the hundreds of thousands of people who listen to this programme kind of as an aside, just the process that one goes through here? You will be talking to shareholders and I guess your best interest is not to have a battle out in the public.

    marc wainer: Absolutely. Look, I think there are two things, Alec. The first thing we made perfectly clear – because it is a PUT, the first step is we have to acquire control of the management company, and that’s subject to regulatory approval. That’ll take three to four months. Once we've got that we can conduct the due diligence into the affairs of the trust, which we will then make public and we will say, based on what we found, this is how we are pricing. And then at the end of the day it's up to shareholders.

    ALEC HOGG: We’ll be keeping a close watch on that story.

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