Summary
· The Boards of Capital & Counties Properties PLC (LON:CAPC) and Shaftesbury PLC (LON:SHB) are pleased to announce that they have reached agreement on the terms of a recommended all-share merger to form the “Combined Group“. It is intended that the Merger will be implemented by way of a scheme of arrangement of Shaftesbury under Part 26 of the Companies Act, which, together with the Existing Capco Shareholding, will result in the Capco Group owning 100% of the issued and to be issued share capital of Shaftesbury on Completion.
Key terms
· Under the terms of the Merger, the Scheme Shareholders shall be entitled to receive:
3.356 New Capco Shares for each Shaftesbury Share held (the “Exchange Ratio”)
· As a result of the Merger, Shaftesbury Shareholders (other than the holders of the Existing Capco Shareholding) will own 53% of the Combined Group and Capco Shareholders will own 47% of the Combined Group.
· The Exchange Ratio has been agreed between the Boards of each of Capco and Shaftesbury taking into account the relative EPRA NTA and market capitalisations of both companies.
· The Capco Group already holds 96,971,003 Shaftesbury Shares, representing approximately 25.2% of Shaftesbury’s issued share capital, as at close of business on the Last Practicable Date.
· It is intended that the Combined Group will be called Shaftesbury Capital PLC on Completion.
· The Merger is supported by Norges Bank (the Central Bank of Norway), a substantial shareholder of Capco and Shaftesbury, which has irrevocably undertaken to vote in favour of the Merger, and Madison International Realty Holdings, LLC, a shareholder of Capco, which has provided a letter of intent to vote in favour of the Capco Resolutions.
· When taken together with the irrevocable undertakings provided by Shaftesbury’s Directors and Capco’s Directors, this represents total support in aggregate of:
o 35.3% of the total votes which could be cast at the Court Meeting by Scheme Shareholders who are entitled to vote (based on Shaftesbury’s issued share capital as at close of business on the Last Practicable Date); and
o 19.2% of the total votes which could be cast on the Capco Resolutions (other than the Related Party Transaction) as at close of business on the Last Practicable Date.
Background to and reasons for the Merger
· The Merger will bring together two respected real estate companies, located in some of the most iconic parts of London’s West End, to create a leading mixed-use central London REIT, with the Combined Group’s portfolio valued at approximately £5.0 billion, Annualised Gross Income of approximately £165.5 million and an estimated rental value (“ERV“) of approximately £218.0 million as at 31 March 2022.
· The Combined Group’s portfolio will comprise approximately 670 predominantly freehold buildings with approximately 2.9 million square feet of lettable space across approximately 2,000 commercial and residential units (excluding the Longmartin Joint Venture and Lillie Square Joint Venture). At 31 March 2022, the Combined Group’s portfolio comprised:
o retail: 35% (approximately £1.7 billion) of the portfolio value;
o hospitality and leisure: 34% (approximately £1.7 billion) of the portfolio value; and
o offices and residential: 31% (approximately £1.6 billion) of the portfolio value (split as 14% residential and 17% offices).
· The Combined Group’s portfolio is located in a number of vibrant, high-profile and high-footfall destinations across London’s West End, including Covent Garden, Carnaby, Chinatown and Soho, close to its major cultural and entertainment attractions, employment locations and transport hubs. Their popularity provides a seven-days-a-week trading environment and exposure to an extensive and diverse local, domestic and international customer base which has proven to be resilient throughout economic cycles.
· The Combined Group will provide a rare opportunity in the listed real estate sector to invest in an exceptional mixed-use portfolio in the heart of central London. The Combined Group will have a strong balance sheet, improved trading liquidity and an enhanced profile in the capital markets, providing an opportunity to improve its equity rating over time.
· By combining both companies’ strengths, cultures and values as well as their proven operating and investment models, the Combined Group’s management team will take a “best of both” approach to operations with the aim of delivering long-term economic and social value for all stakeholders. The Combined Group will place its occupiers and consumers at the heart of the business, offering best-in-class service and focusing on providing lively, differentiated experiences for visitors, local workers and residents. The management team will bring its creative, hands-on, entrepreneurial approach to managing, improving and re-purposing assets with the intention of generating long-term income and value growth.
· Capco and Shaftesbury are both committed to delivering positive environmental and social outcomes through long-term responsible stewardship, sustainable use of heritage and period properties, and engagement with residents and other local stakeholders.
· The Combined Group has a shared commitment to becoming Net Zero Carbon by 2030. The objective is to become a UK leader in sustainability for heritage and period properties. Harnessing the skillsets of both teams, the Combined Group will continue to adopt the existing approach to focus on re-using, improving and re-purposing buildings to extend their useful lives and enhance their energy performance credentials.
· The Boards of Capco and Shaftesbury, each having taken independent financial advice, unanimously believe that the Merger is in the best interests of their respective company’s shareholders as a whole.
Financial impact of the Merger
· The Combined Group has an estimated EPRA NTA of approximately £3.8 billion and EPRA NTA per share of approximately 207 pence as at 31 March 2022.
· There is significant revenue growth potential over time for the Combined Group as shown by the difference between Annualised Gross Income of approximately £165.5 million and ERV of approximately £218.0 million as at 31 March 2022.
· The Merger is expected to generate significant benefits over the long term. Following Completion, incremental asset management opportunities, delivery of a dynamic leasing and marketing strategy across the Combined Group’s portfolio, enhanced connectivity of its adjacent locations, and synergies are anticipated to create the opportunity for long-term income, earnings and value growth for shareholders.
· Efficiencies in the Combined Group’s operating structure are expected to generate approximately £12 million of pre-tax recurring cost synergies on an annual run-rate basis by the end of the second full year following Completion.
· For Capco Shareholders, the Merger is expected to be earnings accretive immediately and modestly EPRA NTA dilutive, taking into account the Exchange Ratio, estimated transaction costs and the consolidation of the Existing Capco Shareholding into the Combined Group’s EPRA NTA.
· For Shaftesbury Shareholders, the Merger is expected to be immediately EPRA NTA accretive and modestly earnings dilutive for the first two full years after Completion while the synergies are being realised. Thereafter, the impact on earnings will depend on a number of factors including the extent and timing of the realisation of benefits from the Merger and the future cost of financing.
· The Combined Group will have a strong capital structure with resilience, financial flexibility, efficient access to capital and significant liquidity, with an estimated loan-to-value of approximately 29% as at 31 March 2022. The Combined Group is expected to have approximately £500 million of available liquidity immediately following Completion.
· Capco has entered into a £576 million loan to provide funding certainty in the event that the Shaftesbury Mortgage Bond holders exercise their redemption right following Completion. Based on current market conditions, any drawdown of the Loan Facility Agreement, or restructuring or refinancing of the Shaftesbury Mortgage Bonds is expected to result in increased financing costs for the Combined Group. The Combined Group would seek to mitigate such increased finance costs by capitalising on the increased strength of the Combined Group’s balance sheet following Completion.
· The Combined Group will retain a tax-efficient REIT structure and as such, will be required to distribute a minimum of 90% of rental profits, calculated by reference to tax rather than accounting rules, as a Property Income Distribution (“PID“). Notwithstanding this, the Combined Group will adopt a progressive dividend policy with the intention to deliver long-term sustainable total returns to shareholders. Dividend payments will be determined having regard to, inter alia, growth trends in both underlying and cash earnings, which are expected to be delivered through income growth and cost discipline. To the extent that dividends exceed the amount available to distribute as a PID, the balance will be paid as ordinary dividends.
Governance and Leadership
· The Combined Group will have a strong governance and leadership structure, led by Jonathan Nicholls as non-executive Chairman and Ian Hawksworth as Chief Executive. Situl Jobanputra will be the Chief Financial Officer and Chris Ward will be the Chief Operating Officer.
· The Board of the Combined Group will contain strong non-executive representation from both companies, with four current Shaftesbury Directors, being Richard Akers (as the Senior Independent Director), Jennelle Tilling, Ruth Anderson CVO and Helena Coles joining the Board of the Combined Group and two current Capco Directors, being Charlotte Boyle and Anthony Steains, remaining in place.
· An Executive Committee, which will be responsible for the day-to-day management and operation of the Combined Group, will be established comprising six members. The Chief Executive, Chief Financial Officer and Chief Operating Officer will be joined by Capco’s Michelle McGrath, responsible for the enlarged Covent Garden portfolio including Capco’s Covent Garden assets as well as Shaftesbury’s assets in Seven Dials, Opera Quarter and Coliseum; Shaftesbury’s Andrew Price responsible for the Carnaby, Chinatown, Soho and Fitzrovia portfolios; and Shaftesbury’s Samantha Bain-Mollison responsible for the Combined Group’s leasing.
· After 36 years at Shaftesbury, including 11 years as Chief Executive, Brian Bickell will retire on Completion. Executive directors Simon Quayle and Tom Welton, who have been with Shaftesbury for 35 and 33 years respectively, will also leave the business on Completion.
· Henry Staunton, Capco’s Chairman who has served on the Capco Board for 12 years, will retire on Completion. Jonathan Lane OBE, Non-executive Director, who has served on the Capco Board for three years since March 2019 and previously had been Chief Executive and Chairman of Shaftesbury for 30 years in total from 1986 to 2016, will also retire from Capco’s Board on Completion.
Listing
· Following Completion, the Combined Group will retain Capco’s listing on the London Stock Exchange as well as its secondary listing on the JSE.
Recommendations, irrevocable undertakings and letter of intent
· The Shaftesbury Board, which has been so advised by Evercore and Blackdown as to the financial terms of the Merger, considers the terms of the Merger to be fair and reasonable. In providing their financial advice to the Shaftesbury Board, Evercore and Blackdown have taken into account the commercial assessments of the Shaftesbury Board. Evercore is providing independent financial advice to the Shaftesbury Board for the purposes of Rule 3 of the Code.
· The Shaftesbury Board believes that the terms of the Merger are in the best interests of Shaftesbury Shareholders as a whole and intends unanimously to recommend that Shaftesbury Shareholders vote in favour of the Scheme at the Court Meeting and the resolutions to be proposed at the Shaftesbury General Meeting which are to be convened to approve the Merger, as the Shaftesbury Directors have irrevocably undertaken to do in respect of the 2,519,849 Shaftesbury Shares currently registered or beneficially held in aggregate by them, as well as any further Shaftesbury Shares which they may become the registered or beneficial owner of (save for any Shaftesbury Shares which they acquire pursuant to the exercise of options under the Shaftesbury Sharesave Scheme), representing in aggregate approximately 0.88% of the total votes which could be cast at the Court Meeting by Scheme Shareholders who are entitled to vote based on Shaftesbury’s issued share capital as at close of business on the Last Practicable Date.
· The Merger constitutes a reverse takeover by Capco of Shaftesbury for the purposes of the Code. The Capco Board, which has been so advised by Rothschild & Co, UBS and Jefferies as to the financial terms of the Merger, considers the terms of the Merger to be fair and reasonable. In providing each of its financial advice to the Capco Board, each of Rothschild & Co, UBS and Jefferies has taken into account the commercial assessments of the Capco Board. Rothschild & Co is providing independent financial advice to the Capco Board for the purposes of Rule 3 of the Code.
· The Merger constitutes a Class 1 Transaction and a Related Party Transaction for Capco for the purposes of the Listing Rules and accordingly, Capco will be required to seek the approval of Capco Shareholders for the Merger at the Capco General Meeting. The Capco Board believes that the terms of the Merger are in the best interests of Capco Shareholders as a whole and intends unanimously to recommend that Capco Shareholders vote in favour of the Capco Resolutions to be proposed at the Capco General Meeting which is to be convened to approve the Merger, as the Capco Directors have irrevocably undertaken to do in respect of the 952,777 Capco Shares currently registered or beneficially held in aggregate by them, as well as any further Capco Shares which they may become the registered or beneficial owner of, representing in aggregate approximately 0.11% of Capco’s issued share capital as at close of business on the Last Practicable Date.
· Shaftesbury has received an irrevocable undertaking from Norges Bank in respect of 98,925,310 Shaftesbury Shares (as well as any further Shaftesbury Shares which they may become the registered or beneficial owner of or otherwise interested in), to vote in favour of the Scheme at the Court Meeting and the resolutions to be proposed at the Shaftesbury General Meeting. When taken together with the irrevocable undertakings provided by Shaftesbury’s Directors, this represents total support in aggregate of 101,445,159 Shaftesbury Shares, representing in aggregate approximately 35.3% of the total votes which could be cast at the Court Meeting by Scheme Shareholders who are entitled to vote based on Shaftesbury’s issued share capital as at close of business on the Last Practicable Date.
· Capco has received an irrevocable undertaking from Norges Bank in respect of 127,656,465 Capco Shares (as well as any further Capco Shares which they may become the registered or beneficial owner of or otherwise interested in), and a letter of intent from Madison International Realty in respect of 34,783,462 Capco Shares, to vote in favour of the Capco Resolutions to be proposed at the Capco General Meeting. When taken together with the irrevocable undertakings provided by Capco’s Directors, this represents total support in aggregate of 163,392,704 Capco Shares, representing in aggregate approximately 19.2% of Capco’s issued share capital as at close of business on the Last Practicable Date entitled to vote on the Capco Resolutions other than the Related Party Transaction.
Pre-Completion Dividends
· Capco and Shaftesbury have agreed that they will be entitled to pay certain permitted dividends to their respective shareholders prior to the Effective Date in respect of the period up to 30 September 2022, without any adjustment to the Exchange Ratio, further details of which are set out in the full text of this Announcement.
· If Completion occurs after 31 December 2022, Capco and Shaftesbury expect to put in place additional arrangements to facilitate the ongoing payment of ordinary course dividends to both sets of shareholders in the period up to Completion.
· Following Completion, the Combined Group will move onto Capco’s existing dividend timetable, with the first dividend expected to be in respect of the period from 1 October 2022 to 31 December 2022.
Information on Capco
· Capco is one of the largest listed property investment companies in central London and is a constituent of the FTSE-250 Index.
· Capco’s landmark Covent Garden estate, which comprises over 1.0 million square feet of lettable space, across 380 lettable units, is a leading retail and dining destination in the heart of central London. The area is home to a wide variety of British, global and independent brands including Apple, Chanel, Tom Ford, Strathberry, Ave Mario, Balthazar and SUSHISAMBA, with upcoming openings from Peloton and Reformation. As at the date of this Announcement, Capco owns 25.2% of the existing share capital of Shaftesbury. Capco is a Real Estate Investment Trust and its shares are listed on the London Stock Exchange with a secondary listing on the JSE.
· As at 31 March 2022, Capco had approximately £1.8 billion of gross property assets, and its 50% share of gross property assets held in the Lillie Square Joint Venture and related assets were valued at approximately £85 million. On an adjusted basis, updating the 31 December 2021 audited net assets for (i) the 31 March 2022 external valuations and (ii) the market value of the Existing Capco Shareholding in Shaftesbury as at 31 March 2022, Capco’s unaudited net assets were approximately £1.8 billion and its unaudited EPRA NTA per Capco Share was approximately 217 pence. The external valuations by CBRE for properties owned by the Capco Group and by JLL for properties owned by the Lillie Square Joint Venture, each as at 31 March 2022, are contained in Appendix 5 to this Announcement.
Capco trading update
· As at 31 March 2022, the external property valuation of Capco’s Covent Garden estate was approximately £1.8 billion, representing a like-for-like increase of 2.1% in the first quarter of the year. The movement was driven by an increase of 1.0% in ERV on a like-for-like basis to approximately £77.1 million as well as a reduction in the equivalent yield of 5 basis points on a like-for-like basis to 3.83% reflecting positive leasing activity and high occupancy levels across all uses.
· Up to June 2022, 23 new leases and renewals representing £3.6 million of rental income have completed on average 10% ahead of December 2021 ERV. Annualised Gross Income at 31 March 2022 was £58.3 million.
· On the estate, footfall continues to trend towards pre-pandemic levels and customer sales in aggregate are ahead of 2019, reflecting the continued recovery of London’s West End and the appeal of Covent Garden.
· 10 new brands have recently opened, further strengthening the occupier line-up. These include TAG Heuer, Rails and The Chestnut Bakery. Empresa has opened on Henrietta Street whilst e&e jewellery and Sacred Gold have both opened within the Market Building. Luxury watch brand Tudor, active wear brand Vuori and luxury perfume house Parfums de Marly will open in the coming months, alongside Peloton’s European Studio and Watchhouse Coffee adding to the vibrant and rich mix at Covent Garden.
Information on Shaftesbury
· Shaftesbury is a REIT which invests exclusively in the heart of London’s West End and is a constituent of the FTSE-250 Index. Focused on hospitality, retail and leisure, its portfolio is mainly in Carnaby, Seven Dials and Chinatown, but also includes substantial ownerships in Opera Quarter and Coliseum, Soho and Fitzrovia.
· Extending to approximately 16.5 acres, following the purchase of a property at 92-104 Berwick Street which completed after 31 March 2022, and comprising approximately 1.9 million square feet of space, across 1,556 units, the portfolio comprises over 600 restaurants, cafés, pubs and shops (across approximately 1.1 million square feet), approximately 0.4 million square feet of offices and 631 apartments. All of Shaftesbury’s properties are close to the main West End Underground stations, and within ten minutes’ walk of the two West End transport hubs for the Elizabeth Line, at Tottenham Court Road and Bond Street.
· In addition, Shaftesbury has a 50% interest in the Longmartin Joint Venture, which has a long leasehold interest, extending to approximately 1.9 acres, at the junction of Long Acre and Upper St Martin’s Lane near Seven Dials.
· As at 31 March 2022, Shaftesbury had approximately £3.3 billion of gross property assets, and its 50% share of gross property assets held in the Longmartin Joint Venture was valued at approximately £172.8 million. Shaftesbury’s unaudited net assets were approximately £2.6 billion and its unaudited EPRA NTA per Shaftesbury Share was approximately 679 pence. The external valuations by Cushman & Wakefield for properties owned by the Shaftesbury Group and by Knight Frank for properties owned by the Longmartin Joint Venture, each as at 31 March 2022, are contained in Appendix 5 to this Announcement.
Timetable and Conditions
· It is intended that the Merger will be implemented by way of a scheme of arrangement of Shaftesbury under Part 26 of the Companies Act, further details of which are contained in the full text of this Announcement. Capco reserves the right to implement the Merger by way of a Takeover Offer, subject to the Panel’s consent and the terms of the Co-operation Agreement.
· As a result of its size, the Merger constitutes a Class 1 Transaction for Capco for the purposes of the Listing Rules. Accordingly, Capco will be required to seek the approval of Capco Shareholders for the Merger at the Capco General Meeting.
· The issue of New Capco Shares to Norges Bank as part of the Merger will constitute a Related Party Transaction between Capco and Norges Bank for the purposes of the Listing Rules. Accordingly, Capco will also be required to seek the approval of Capco Shareholders (excluding Norges Bank) at the Capco General Meeting.
· The Merger is subject to the satisfaction or, where applicable, waiver of the Conditions and certain further terms set out in Appendix 1 to this Announcement and to the full terms and conditions which will be set out in the Scheme Document. These Conditions include, amongst others:
o the approval of the Scheme by the Scheme Shareholders (or the relevant class or classes thereof, if applicable, unless all members of any such class have consented to be bound by the Scheme) present and voting, either in person or by proxy, at the Court Meeting (or at any separate class meeting which may be required by the Court) and the approval of the requisite majority of Shaftesbury Shareholders at the Shaftesbury General Meeting;
o the approval of the Capco Resolutions at the Capco General Meeting;
o the CMA issuing a decision that it is not the CMA’s intention to make a Phase 2 CMA Reference, with such a decision being issued on an unconditional basis or else conditional on the CMA’s acceptance of undertakings which are reasonably satisfactory to Capco and Shaftesbury (or the applicable time period having expired without a Phase 2 CMA Reference) (the “CMA Condition“);
o the sanction of the Scheme by the Court; and
o Admission.
· The Scheme Document will contain full details of the Merger and the Scheme, together with notices of the Court Meeting and Shaftesbury General Meeting and will specify the action to be taken by Scheme Shareholders. It is expected that the Scheme Document will be dispatched to Shaftesbury Shareholders (together with the forms of proxy) within 28 days of this Announcement (unless otherwise agreed by the Panel, Capco and Shaftesbury).
· Capco will prepare and send to Capco Shareholders the Circular summarising the background to and reasons for the Merger which will include a notice convening the Capco General Meeting. It is expected that the Circular will be posted to Capco Shareholders (together with the form of proxy) at the same time as the Scheme Document, with the Capco General Meeting being held at or around the same time as the Shaftesbury General Meeting and the Court Meeting.
· Capco will also be required to produce a Prospectus in connection with Admission. It is expected that the Prospectus, containing information about the New Capco Shares, will be published at or around the same time as the Circular is posted to Capco Shareholders and the Scheme Document is posted to Shaftesbury Shareholders.
· The Scheme is expected to become effective by the end of 2022, subject to the satisfaction or, where applicable, waiver of the Conditions and certain further terms set out in Appendix 1 to this Announcement and to the full terms and conditions to be set out in the Scheme Document.
· An expected timetable of the key events of the Merger will be set out in the Scheme Document.
Commenting on the Merger, Henry Staunton, Chairman of Capco, said:
“As the retiring Chairman of Capco, I am delighted by the prospects offered by the proposed merger with Shaftesbury to shareholders as London’s West End continues its recovery. I have every confidence in the ability of the combined management and Board of Shaftesbury Capital to deliver sustainable value growth for shareholders and benefits for broader stakeholders from its unique portfolio of properties.”
Commenting on the Merger, Jonathan Nicholls, Chairman of Shaftesbury, said:
“The merger of Shaftesbury and Capco unites two complementary and adjacent real estate portfolios under single ownership. Shaftesbury Capital will own a first-class portfolio in some of the most iconic destinations across London’s vibrant West End. The experienced leadership team, with their impressive track record of innovation and curation, should ensure a sustainable and prosperous future for our destinations, the communities they serve and our wider stakeholders. With cost and operational synergies, a strong corporate governance framework, increased scale and greater equity market liquidity, the combination also provides a firm foundation for future value creation for our shareholders.
On behalf of the Shaftesbury Board, I would like to thank Brian Bickell, Simon Quayle and Tom Welton for their truly extraordinary commitment to Shaftesbury over many decades. Their contribution to its success has been beyond measure and they will be leaving the business in a strong position for their successors.”
Commenting on the Merger, Ian Hawksworth, Chief Executive of Capco, said:
“The proposed merger is an exciting opportunity to bring together two exceptional property portfolios in London’s vibrant and thriving West End. By combining the creativity and knowledge of our talented and experienced management teams to deliver sustained income and value growth Shaftesbury Capital aims to become a leading central London mixed-use REIT.
I am very much looking forward to working with my new and existing colleagues as we continue to curate wonderful places and experiences for our occupiers, visitors, local workers and residents in the heart of one of the world’s greatest cities.”
Commenting on the Merger, Brian Bickell, Chief Executive of Shaftesbury, said:
“Over the last 36 years, Shaftesbury has built a portfolio of the highest quality and it has been an honour to lead the company as Chief Executive for the last 11 years. As we emerge from the disruption of the pandemic, we are seeing increased confidence and growth once again, demonstrating the resilience of the West End and our locations. The merged business will have an exceptional portfolio, located in popular and busy parts of London’s vibrant West End, and an experienced and innovative team drawn from both businesses. I am confident that Shaftesbury Capital will continue to be a major contributor to the success of London’s West End as well as an attractive proposition for investors.”
