NewRiver REIT has made a cash and share offer to acquire Capital & Regional for £147m.
Under the terms of the offer, Capital & Regional shareholders would be entitled to receive 31.25p in cash and 0.41946 NewRiver shares.
On the basis of the closing price per NewRiver share of 74.5 pence on 22 May 2024 (being the last day before the offer period commenced), the offer implies a value of 62.5p per Capital & Regional share and around £147m for the entire issued, and to be issued, ordinary share capital.
This represents a premium of 21% to the closing price of a Capital & Regional share of 51.5p on that date, a 21% premium to the three-month average price of 51.7p and an 18% premium to the six-month average price of 53.0p.
Under the terms of the deal, Capital & Regional shareholders would own approximately 21% of the issued ordinary share capital of NewRiver.
It is proposed that the cash part of the offer would be funded from NewRiver’s existing cash resources and the net proceeds of a placing to raise £50m.
Any firm offer, if made, would be subject to the approval of Capital & Regional shareholders and NewRiver shareholders would also be required to approve certain resolutions connected with the allotment and issue of the new NewRiver shares to Capital & Regional shareholders.
Rationale for the possible offer
Both companies are focused on investing in the UK retail real estate sector, specifically shopping centres. Capital & Regional has gross assets of £350m at 30 June 2024 and a market capitalisation of around £144m.
The NewRiver board said that it believes there is a strong strategic, operational and financial rationale for the combination and that the combined group would benefit from enhanced scale, material cost savings, mid- to high-teens accretion to UFFO per share, better access to acquisition and asset management opportunities, improved debt optionality, expected cost of capital benefits and the potential for increased share liquidity.
It added that following a challenging period for the UK retail real estate sector, in which capital values have materially rebased, with the MSCI UK Shopping Centres Index declining by 53% between June 2019 and June 2024, it believes the combination represents a unique opportunity to create a significantly enlarged portfolio at an attractive point in the market cycle.
The combined company would have a retail portfolio worth £0.9bn, comprising 47 assets generating annualised rent of £90m, and with assets under management of £2.4bn (comprising 84 assets).
Around 87% of Capital & Regional’s tenants are classified as value and essential goods retailers compared to 80% of NewRiver’s tenant base, which are considered low-risk.
The combined group’s portfolio would benefit from a material yield premium, with an equivalent yield of 8.5% compared to the UK retail and industrial sector averages of 6.8% and 6.1% respectively.
The combination would be expected to unlock around £6.2m of net pre-tax run-rate recurring annual cost synergies, the majority of which would be expected to be effective shortly following completion of the merger with the full benefit of the synergies expected to be unlocked within 12 months of completion.
NewRiver’s board expects the group LTV to be in line with NewRiver’s existing LTV guidance. On completion of the combination, the group would benefit from a weighted average cost of 3.5% across drawn debt of £444m with no maturity on drawn debt until January 2027.
It also expects that the merger would increase share liquidity.
