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Frasers Centrepoint Has Launched an Official Acquisition-Bid: What Does It Mean for the Company?

Australand

After first announcing a potential takeover of Australand Property Group (ASX: ALZ) in early June this year, Frasers Centerpoint (SGX: TQ5) has completed its due diligence for the deal and announced yesterday that it has launched an official bid.

Real estate developer Frasers Centrepoint is looking to acquire Australand for A$4.48 per stapled security (that works out to a total sum of around S$3.0 billion), a figure that’s unchanged from its previous June announcement regarding the takeover.

Australand is one of the largest property developers and owners in Australia. Interestingly, it was previously a subsidiary of CapitaLand (SGX: C31) before CapitaLand had disposed of its stake late last year.

Frasers Centrepoint’s bid is 22% higher than Australand’s net tangible assets and 15% higher than its weighted average price over the past three months.

What can Frasers Centrepoint most likely do with the acquisition?

The whole acquisition would cost Frasers Centrepoint about S$3.0 billion as mentioned earlier and the company plans to finance most of the acquisition with debt. Frasers Centrepoint’s latest financials show it having a total debt load of S$3.7 billion while having only S$656 million in cash; in addition, the acquisition of Australand might potentially result in a near-doubling of the company’s total borrowings.

From the looks of it, the most likely strategy for Frasers Centrepoint is to do a leveraged buyout (LBO). In a LBO, the acquirer would assume debt (which Frasers Centrepoint is going to do) to complete the bulk of the acquisition and then find ways to pay down the debt, which might include spinning-off the assets of the acquired target.

Regarding possible spin-offs, Frasers Centrepoint has a wide stable of real estate investment trusts to house different types of properties; currently, the company’s the sponsor and manager of Frasers Centrepoint Trust  (SGX: J69U) and Frasers Commercial Trust  (SGX: ND8U). The two REITs are focused on retail malls and commercial real estate respectively. Then, there’s also the upcoming listing of Frasers Hospitality Trust, a stapled trust which deals with hospitality-related assets.

The aforementioned REITs might thus be used as a means for Frasers Centrepoint to raise capital to pay-down debt by using them to buy up some of Australand’s various properties.

Foolish Summary

Naturally, most business deals would come with their share of risks and this acquisition is no exception. The key risk Frasers Centrepoint faces here is a sharp rise in interest rates; if that happens, the company might be hit with a double whammy of increased interest expenses and lower real estate prices. Whether Frasers Centrepoint would end up being a genius or a fool (small “f”) in this acquisition might lie with how the interest rate environment evolves in the future and how the company handles its highly-leveraged 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.