DealZone Daily
Prudential says it has appointed Rob Devey, head of the UK insurer’s British and European operations, to lead the integration with AIG’s Asian life insurance arm. Read the Reuters story here.
And in news reported by other media on Wednesday:
Morgan Stanley has told investors that its $8.8 billion real estate fund may lose nearly two-thirds of its money due to bad investments, according to the Wall Street Journal, which reviewed fund documents.
US specialty chemicals maker Lubrizol has joined a string of other bidders in talks to buy Cognis, with an offer that could value the German maker of additives for cosmetics and detergents at about $4.1 billion, the Financial Times said.
Tishman’s StuyTown capitulation
Perhaps the most shocking thing about Tishman Speyer Properties’ decision to sign over its Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to creditors is that it comes this late in the real estate down cycle.
The acquisition of the property in 2006 was one of the largest of the real estate boom at $5.4 billion. The venture finally defaulted on its mortgage this month. The value of the complex is believed to have fallen to $2 billion or less.
In its post-mortem, the naked capitalism blog, noting the aggressive increases in rentals the buyers had projected, called the deal “a classic example of peak of cycle excess.”
Singing along with Frank Sinatra, it’s not hard to find real estate investors who believe Manhattan will never lose its price hype. Their faith has always been blessed by tenant-friendly rent-fixing and other socially redeeming characteristics that may have seemed like solid struts for the project back at the peak of the cycle.
Tishman and Co had hoped to increase rents on the complex’s apartments to higher, “market” levels, but New York’s highest court in October rejected that. Imagine the hubris that had to be involved. The rate of return, even distorted by rent control, would not have been hard to make sound like a no-brainer to bankers in 2006. According to Wikipedia, in 1947, rents ranged from $50 to $91 per month, while current rents range from $2,850 for a one-bedroom apartment to $7,000 for a five-bedroom unit.
Now the best the venture can come up with is a statement that it had “no intention” of putting the roughly 11,200-apartment property in bankruptcy, opting instead to transfer control and operation to lenders.
DealZone Daily
Tuesday’s highlights:
* U.S.-based Kraft Foods Inc and Britain’s Cadbury Plc are close to sealing a friendly deal to create the world’s largest confectionery group for up to 11.7 billion pounds ($19 billion), sources familiar with the matter say.
* Japan Airlines Corp’s board of directors decided on Tuesday to file for bankruptcy protection, Kyodo news agency says.
* Industrial conglomerate Tyco International will acquire Broadview Security for $1.9 billion in a deal that brings together two large providers of residential and commercial security in North America, the two companies say.
* Chinese wind power producer Xinjiang Goldwind Science & Technology Co has chosen China International Capital Corp (CICC) as lead underwriter for a Hong Kong initial public share offering aimed at raising $1.5 billion in the first half of 2010, sources close to the plan say.
For more on these and the rest of the latest deal-related news from Reuters, click here.
And elsewhere (some external links may require subscriptions):
GMAC plays its too-big-to-fail card… again
The Treasury, as major shareholder of such credit boom casualties as Citigroup and General Motors, showed with its $3.8 billion infusion into GMAC that it can still be counted on to safeguard the financial system from systemic collapse. The auto-loan company, which had dutifully spread its wings into mortgages in the housing boom, wound up becoming a bank to qualify for TARP bailout funds a year ago – the day after Christmas 2008, to be precise. How could Treasury say no?
Now taxpayers are plonking another $3.8 billion into GMAC to help cover mortgage losses. That gives us another majority shareholding in a company that could not have survived to pay its bills, workers and its executives without aid. No, it’s not much in terms of the government’s balance sheet. But it should rankle in Congress when lawmakers come back from holiday.
Not far behind the brouhaha over universal health care lays the still smoldering debate over “too big to fail”. Is it naïve to note that the timing of GMAC’s new lifeline came when legislators were safely tucked away at home? Arguing that AIG was too big to fail, with its myriad confusing and distracting derivative contracts, and that GM was too big to fail, with its strategic position just behind the aorta of the American manufacturing heartland, or even that Citigroup, with its corner office (sans fireplace) in the U.S. superbanking community can somehow be extended to GMAC might seem farfetched to fiscal hawks.
A report in the New York Post last week certainly would have helped GMAC’s cause. The paper said that Warren Buffett was looking at taking on at least part of ResCap, GMAC’s real estate lending operation. That would probably have gone some way to convincing Treasury folk that GMAC was moving in the right direction. Many analysts see GMAC’s mortgage assets, which make up about a third of the company’s $178.2 billion balance sheet, as the main obstacle to the lender reaching profitability. GMAC said after the capital infusion it does not expect to record more major losses from its mortgage lending unit, which should help stabilize results. Well, if majority government ownership doesn’t stabilize the situation, too big to fail would not be an issue.
Noted: 5-year funk means no office firesales
Despite a looming wave of defaults, sell-offs of European offices at knock-down prices are unlikely, because commercial property prices are likely to tread water for years, rating agency Moody’s says.
in a report on the region’s commercial mortgage-backed bond market, Moody’s said it expects more loan defaults, but doesn’t think commercial property values will “materially recover” for the next five years. (Reuters report here.)
This means that special servicers — the administrators responsible for deciding the future of bust securitisations — “will not pursue immediate sale of the properties … but rather continue to collect the rental cash flows where possible and dispose of the properties under more favourable conditions, which may reduce ultimate losses,” the agency said.
Some foreign buyers have not been put off, with South Korea’s National Pension Service spending 268 million pounds on a pair of prime London office buildings.
Deals du Jour
General Motors’ upcoming Volt model will run up to 230 miles per gallon of fuel, but the saga to sell off its European operations seems equally long-lasting. The bidding process is now between two bidders — Magna International and RHJ International — with GM’s CFO Ray Young telling Reuters earlier that “everyone is anxious to get this thing done”.
In other M&A related stories reported by media on Wednesday:
Indian state-run explorer Oli and National Gas Corp is in talks with three Russian firms about a joint bid for a stake in YPF the Argentinean arm of Spanish oil major Repsol YPF SA, the Economic Times reported.
JP Morgan is looking to sell 23 office properties in what may be the country’s largest office real estate sale this year, the Wall Street Journal said. Here’s Reuters’ report.
It’s hard to imagine that our infrastructure is ready for a 230mpg car. I’m for it, but we seem to still be so oil dependent and because of this we still seem to need cars that use more gas. I really hope we can get beyond the need to fuel our economy on off-shore gas..
Paul
Half empty glass
The recent history of Britain’s eccentrically-named Slug & Lettuce pubs should make a sobering read for ambitious property investors with an eye on similar investments.
The chain’s woes began in 2005, when its then owner, the SFI Group, plunged into administration due to difficulties with its finances.
Its collapse triggered property tycoon Robert Tchenguiz to buy up the group’s best outlets and bring them into his Laurel Pub Company.
Three years later, it was the turn of heavily indebted Laurel to crash into administration, caught out by a downturn in the economy and difficult financing conditions. As part of the adminstration process Laurel split into two, with the Slug & Lettuce pubs placed into a new company, the Bay Restaurant Group, as part of its portfolio of 190 outlets.
Yesterday, Bay Restaurant agreed its second financial rescue in as many years, with banks agreeing a new 150 million pound loan in exchange for taking a stake in the company. The banks providing the rescue financing were Iceland’s Kaupthing and Germany’s Commerz – hardly strangers to rescues themselves.
Tchenguiz’s property investment vehicle R20 has not had an interest in the company since March 2009, bringing to an end the company’s bid to make profits from a heady cocktail of leverage, property and pubs.
This mix powered a succession of boom-time pub deals in the first part of the decade, when billions of pounds were borrowed against the income of drinkers’ regular haunts. Punch Taverns (PUB.L) and Enterprise Inns (ETI.L) were among those that supped deeply on the ample liquidity sloshing around the markets.
Deals du Jour
New European regulations made headlines on Tuesday as the former chief executive of Man Group hit out at proposed changes to hedge fund rules and the first details of new European bank regulations emerged.
Other stories to make the newspapers include:
* Bondholders to Northern Rock, the UK bank rescued by the state, are being repaid ahead of the British government due to a contract breach in 2008, the Guardian reported.
* London Residential Opportunities, a new residential property fund, is looking to raise 50 million pounds ($81.16 million) in equity ahead of floating on the London Stock Exchange later this year, according to the Daily Telegraph.
* Preparations are being made to put Independent News & Media (INNZF.PK) into examinership — an Irish form of bankruptcy protection — in case restructuring talks fail, the Times reported.
* China’s state-owned Beijing Automotive faces long odds in its bid to buy European carmaker Opel due to Chinese reluctance to buy foreign auto firms, according to influential Chinese magazine Caijing.
For all the latest deals news from Reuters, click here.
Private equity underwater
The private equity industry has indeed sunk if it is being compared with the Beatles’ Yellow Submarine.
Asked at Dow Jones’ Limited Partners conference to come up with a theme song for the industry, Nick Ashmore, head of private equity at the National Pensions Reserve Fund in Dublin, reeled off an imaginative few suggestions including:
Yellow Submarine ; nominated for all the funds underwater; and “Hotel California”, dedicated to all the real estate funds where investors could check out but never leave.
Ashmore told investors at the conference he had “sensible” expectations about returns from buyout deals done at the top of the boom, particularly from the bubble period of early 2006 to mid-2007. “We don’t expect them to generate massive returns.”
He has “very high expectations for capital we have committed but not deployed” but doesn’t see himself deploying much cash this year to the asset class.
“If we do any commitments at all this year it will be very modest and probably be around distressed,” Ashmore said.
Moreover, investors — known as LPs — aren’t working together to push for better terms.
I agree it is the best time around the year to go for distressed assets as most of them are for sale and at dirt cheap prices. but every investment comes with caution except emerging economies like China and india globally there is hardly any growth reported esp. in the consumer driven segments.
Keeping score: Rio, real estate, rising rates
This week’s Thomson Reuters “Investment Banking Scorecard” is out. Here are the highlights:
“BHP/Rio Tinto Deal Changes Global M&A Landscape
“The announcement of a joint venture between Australia’s BHP Billiton and domestic rival Rio Tinto last Friday ranks as the second largest worldwide deal this year and may prove fruitful for some investment banks. Advisors Gresham Partners, Lazard, Morgan Stanley, and Goldman Sachs will advise on the deal, translating to valuable deal activity in a year where M&A volume is down 43%. Earlier this year, Chinalco announced a multi-continent $19 billion investment in Rio Tinto, which was withdrawn as a result of the new mega-deal. Of the seven banks on the initial Chinalco deal, only Morgan Stanley, ranked first for worldwide M&A year-to-date, secured a role on the BHP deal.
“Real Estate Equity Capital Markets Activity up 85%
“Equity capital markets offerings from real estate issuers have soared so far in 2009, while activity in the M&A, DCM, and loans segments remains down from 2008. Real estate ECM volume is up 85% over last year at $36.5 billion. Activity in the Americas accounts for 44.7% of the total volume across the sector, followed by Asia (including Japan) with 36.6% and Europe with 18.4% share of the market.
“The recent follow-on offering from real estate investment trust Boston Properties for $862.5 million contributed to this total.
“Rising Interest Rates Slow Investment Grade Debt
