Monday 27 January 2014

Hedge Funds move on Major Multiples Store Portfolios

According to reports in The Sunday Times (p1 Business section, 26-01-2014) hedge funds have taken stakes in Tesco, Sainsbury’s and Morrisons with a radical plan to hive off their property empires.  In other words, American activist investors (Elliott, and apparently other activist funds have acquired small stakes in the three retailers) believe that, especially following disappointing Christmas results, the stock market undervalues the properties and that hiving off and flotation of the new property companies would release some of that value by appealing to a new type of ‘property-focused’ investor..

The plan is based upon a similar move last year by Loblaw.
(Morrisons are already exploring some property release, and Dalton Philips includes Loblaw on his CV...)

The ‘hidden’ value:
Retailer          Market capitalisation  Estate value   'Surplus'
Tesco                      £26bn                      £38bn             £12bn                                                                              
Sainsbury’s              £6.9bn                    £11.5bn          £4.6bn                                                                          
Morrisons                £5.7bn                     £9bn              £3.3bn

More details are available in The Sunday Times article.

Incidentally, for those in H&B, Elliott recently forced US drugs distributor McKesson to raise its bid for Celesio, in a deal now concluded.

Whilst the activist-investor route may well be resisted by the retailers, the idea of releasing value that could be part-returned to shareholders might appeal, thus propping up the share price…

However, in doing so, the retailers would lose some control, and also pick up an additional KPI based on maintaining the value of their retail properties, at a time when all three are focused on optimising like-for-like sales… However, if the hedge funds increase their stakes, then increasing shareholder value moves up the agenda, along with the aggravation...

For NAMs, all of this means that a renewed emphasis on financial performance, the value of trade investment and especially the ability to calculate and demonstrate the impact of all supplier-support on the retailer’s share price, becomes a critical requirement in the day-job…

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