Business Opinion: Peace appears to have broken out at Real Estate Opportunities (REO), the Jersey registered but Dublin- and London-quoted property vehicle, writes John McManus.
After a stand-off lasting the best part of two years, an exit mechanism has been found for two of the largest shareholders, the UK investment house Dawnay Day and Dublin solicitor Noel Smyth, who between them control 40 per cent of the company.
The size of their stake has allowed them to frustrate many of the ambitions of the other large shareholders, Richard Barrett and John Ronan, who control 37 per cent of the company through their Treasury Holdings vehicle.
It is, as we have come to expect from REO, a very complex transaction. However, in essence, the dissident shareholders are being bought out for £46 million (€67.8 million). Some of their shares are being placed with institutions and the remaining shares are being bought back by the property company and cancelled.
The buyback is linked to another transaction, which will see REO buy a couple of properties from Treasury in what is essentially an all-paper deal.
The consequence of this will be to increase Treasury's stake to something in the region of 56.5 per cent - which, in theory, should oblige them to bid for the company. However, a waiver has been sought from the Takeover Panel, which will require approval from REO shareholders at an extraordinary general meeting on May 5th.
The property deal is the enabler for the buyout, which, on its own, is not a very attractive proposition for the other shareholders of REO.
As the company acknowledges in the offer document, the repurchase and cancellation of almost 34 million shares held by Dawnay Day and Smyth would effectively dilute the net assets per share, although no figure is put on the dilution.
However, as the company also points out, the purchase of properties valued at €74 million from Treasury, paid for in REO shares, results in an enhancement of net assets per share that will "offset the diminution resulting from the cancellation of Ordinary Shares referred to above".
Again, no specifics are given in the letter sent to shareholders from the directors of REO.
The proposition that Barrett and Ronan appear to be putting to the other shareholders is: "Let us use some of your money to sort out Dawnay Day and Smyth and we will sell you two of our properties at a good price."
If that is the case, then it's probably not a bad offer, as a continuation of the stalemate that it will unblock is not in anyone's interest.
However, it would be nice to see some hard figures for the impact of the two transactions on net asset value per share and exactly what "offset" means in this context.
The property transaction is also the deal maker in another sense.
Central to the other leg of the Dawnay Day and Smyth buyout is convincing a number of institutions that they want to buy part of their stake at 58.5p per share. By agreeing to sell two attractive properties, including its Barrow Street head office, at net asset value for REO shares, Treasury has effectively put its money where its mouth is in terms of saying that there is value in the REO share price.
A dilution of their interest in two of their properties appears to be the price that Barrett and Ronan will pay to resolve the impasse at REO.
They are unlikely to be thrilled at the prospect but there are plenty of compensations.
They will have effective control of REO (more than 50 per cent of the equity) without having to make a bid. In addition, they will not have to deal with Dawnay Day and Smyth, who were in a position to block any transaction requiring the support of 75 per cent or more of shareholders. The lucrative management contracts they have with the company will also remain in place.
But what about the ubiquitous small shareholder? What's in it for them and should they vote in favour of the deal at next month's extraordinary general meeting?
It is worth noting that only shareholders not connected to Treasury, Dawnay Day and Smyth can vote on the resolution waiving the need for Treasury to make a bid for the company.
If this resolution falls, then the whole deal collapses, which raises the prospect that small or independent shareholders who control around 25 per cent of the company could block the deal if they turn up in sufficient numbers and vote down the resolution at the general meeting.
However, the largest of the independent shareholders, an Isle of Man company called Calyx, has always voted its 8.37 per cent stake in Treasury's favour. The beneficial ownership of Calyx has not been disclosed.
Small shareholders would appear to have a real choice to make for a change.
The deal does have some attractions. It ends the deadlock and lets Treasury get on with what it does best at REO - property development. It also appears positive in terms of assets per share, but to an unspecified extent.
Against that, Treasury will have taken control without making a bid and paying a premium - although any further stake building would trigger one. Some new institutions will come on board as shareholders, but the absence of Dawnay Day and Smyth means that there are no powerful shareholders to counterbalance Treasury's influence.
One suspects that the deal will go through, but Treasury must be kicking itself for not buying the whole thing when the shares were less that 20p two years ago.
