Kennedy Wilson investors baulk at takeover of European affiliate

US real-estate firm Kennedy Wilson’s planned takeover of its European affiliate, including €1 billion of Irish assets, has hit a snag as shareholders in the group balk at the price they are expected to pay, as Brexit clouds the outlook for UK property.

Kennedy Wilson (KW) announced on Monday it planned to acquire the 76 per cent it doesn't already own in London-based Kennedy Wilson Europe (KWE) – in a deal to be paid in stock in the US group.

Shares in KW have since slumped by as much as 11 per cent, wiping about $275 million of the value of the New York-listed company. KWE shares also dropped on Friday as investors fretted about the transaction.

"We understand that some KW shareholders were disappointed with the equity dilution" of the deal, Patrick English, chief executive of Fiduciary Management, which is among the top 15 investors in the company, told The Irish Times.

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The agreement values KWE’s shares at just 3.5 per cent below their net asset value (NAV) – a key measure for property stocks – when the rest of the UK sector is trading at about a 20 per cent discount to NAV amid fears over the outlook for UK property market. Some 56 per cent, or £1.61 billion, of the European portfolio is in the UK, after the company wrote down the value of its assets in world’s fifth-largest economy by £77.6 million last year.

‘Contrarian investor’

Bill McMorrow, chief executive of KW, acknowledged at KWE’s annual general meeting in London on Wednesday that the general perception in the US media is that Europe is underperforming economically. However, he described himself as a “contrarian investor” and said his main investors had been “universally supportive” of his European strategy since it started buying Irish assets in 2011.

Meanwhile, some shareholders in the US group believe they are giving away KW shares to KWE investors too cheaply, according to analysts.

Craig Bibb, an analyst with CJS Securities, said some investors in KW estimate its NAV to be as high as $30 per share – 33 per cent above the $22.50 price at which the stock is valued in the KWE deal. Mr Bibb's NAV estimate is $24, implying a "modest discount".

Fiduciary Management’s Mr English said he is supportive of the transaction. “If you look at the cost of the deal and what they [KW] are getting, we think it makes sense and is fairly attractive, in an environment where there isn’t much value,” Mr English said. “It should provide them lower-cost capital and it gives them assets that they know intimately at a discount.”

Standard & Poor’s, the credit ratings agency, has indicated it may upgrade its rating on KW’s debt – currently considered to be below investment grade – if the transaction goes through. The addition of KWE to the group would give it more geographic diversification and reduce volatility of earnings, it said.

A spokesman for KW declined to comment, while representatives for KWE did not respond to requests for comment.