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Why Would Frasers Centrepoint Be Interested In Australand Property Group?

CapitaLand (SGX: C31) had just completely sold out its majority stake in Australia-based Australand Property Group (ASX: ALZ) this March. The former, one of Singapore’s largest real estate outfits, had decided to use the proceeds to pare down its debt and reinvest in its core markets in China and Singapore.

This is an interesting decision by CapitaLand. Currently, the interest rate environment is near historic lows while both Singapore and China are faced with an overheated property market. But, even with cheap money sloshing around and an undesirable situation in China and Singapore, CapitaLand still feels that the future returns from Australand might not be able to outperform any available alternatives.

With the sale of Australand, it seems that CapitaLand is expecting very low returns from the Australian real estate outfit in the future.

Then, came the contrarian…

Yet, Frasers Centrepoint (SGX: TQ5) had just revealed yesterday its bid for Australand at A$4.48 per stapled security, or A$2.6 billion (around S$3.0 billion) in total. That’s an almost 19.5% premium to what CapitaLand had sold its stake for. In addition, Frasers Centrepoint’s bid is also 3% higher than the A$2.52 billion that Stockland (ASX: SGP), a major Australian property company, had bid for Australand this May.

Why would Frasers Centrepoint want to pursue this deal?

Possible reasons

There are a few possible reasons. Firstly, there is clear synergy between Australand and the existing Australian business of Frasers Centrepoint. Currently, Australia is the second largest market for Frasers Centrepoint in terms of operating profits and asset value. If the two companies are able to combine their operations, it’s likely there can be cost savings and improvements in efficiency.

Secondly, as Australand is one of the largest property owners in Australia, its portfolio might be possible targets for Frasers Centrepoint’s real estate investment trusts, namely Fraser Centrepoint Trust (SGX: J69U) and Fraser Commercial Trust (SGX: ND8U).

This can help Frasers Centrepoint, assuming it has already gained control of Australand, in two ways: 1) it can offload some of Australand’s properties into the REITs to unlock value in those properties and raise some cash to pare down its debt; and 2) if the REITs end up purchasing some of Australand’s properties, that will also increase the assets under management of the REIT and boost management fees for Frasers Centrepoint.

The risks involved

Frasers Centrepoint is planning to fund the whole acquisition using its cash resources and debt. At last count, the company had only S$656 million in cash while carrying S$3.7 billion in total debt.

Currently, Frasers Centrepoint is in the midst of selling some of its assets into a new REIT which is expected to help lower its leverage. But, the proposed acquisition of Australand, if accepted, would likely see Frasers Centrepoint having to bump up its leverage again.

As it stands, Australia has not seen a recession in the past 23 years so Australand and Frasers Centrepoint’s Australian businesses seems safe. But, with Frasers Centrepoint already having a high level of borrowings, taking on additional debt can result in a very risky situation for the company if the Australian economy starts slowing down significantly (as Herbert Stein once famously said, “If something can’t go on forever, it won’t” – that can be applied to Australia’s economy too).

Foolish Summary

As mentioned earlier, Frasers Centrepoint is not the only one interested in Australand – Stockland has also entered a bid. As this is now a public bidding war, Frasers Centrepoint must exercise discipline and not be goaded into paying an exorbitant price for Australand. The perils of making an unwise purchase is exacerbated by the situation, as mentioned earlier, of Frasers Centrepoint having a highly-levered balance sheet.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns Frasers Centrepoint Ltd.