News analysis: Innovative end of year for Westbrook

Westbrook Partners emerged on Tuesday as a white knight for a respected London-based property company with good assets but in need of assistance.

News this week that New York’s Westbrook Partners is underwriting a share offer by a London-based property company demonstrates that private equity firms are capable of being solution providers.

It emerged on Tuesday that O Twelve, a closed-ended investment trust that is listed on London’s junior stock exchange, plans to raise approximately £37.5 million (€44 million; $58 million) to help advance its business plan. But the twist was that the share offer has been underwritten by Westbrook, via Westbrook Real Estate Fund VIII, a $2.25 billion global fund that was raised in 2008 and commenced investment in late 2009.

This is the story of a company launched by the respected management team of Rugby Estates, run by David Tye and Andrew Wilson. They listed O Twelve on the Alternative Investment Markets in March 2006 when it raised £117 million, and the company went on to amass 23 properties for an aggregate of £270 million (two assets of which subsequently have been sold).

The portfolio is fundamentally sound. The idea upon IPO was to assemble assets in and around Stratford in east London, near to the site where the London Olympic Games 2012 will be held – hence the name O Twelve. The assets are spread around, not just in east London, but further out into the Thames Gateway as well.

Providing the equivalent to an Olympian’s steroid boost,  Westbrook has agreed to underwrite the £37.5 million share offer.

But like so many other property companies, the quality of the assets has not been the problem. Values have fallen across the board, and O Twelve found itself breaching banking covenants. One of those loans was supplied by the UK building society, Nationwide, which up until recently sponsored the England football team.

Without the proposed new £37.5 million of equity to be  raised via a fresh share offer, O Twelve may not be able to pay down a portion of its debt, it will have limited access to cash resources and may not be able to further advance its business plan. This is exactly what private equity real estate firms were predicting at conferences such as the PERE Forum: Europe two years ago when the credit crunch hit.

In the run up to the Olympics, O Twelve is understandably keener than ever to continue buying property given the uplift potential for properties in an around Stratford in east London, where widespread regeneration projects are well under way.

In a normal functioning market, existing lenders would have been better able to arrive at a constructive agreement to help O Twelve achieve its aim. But this is still no ordinary functioning market, and existing investors wouldn’t want a long protracted negotiation between a number of banks who ultimately fail to find a united way forward. So cue New York private equity real estate firm Westbrook.

Providing the equivalent to an Olympian’s steroid boost,  Westbrook has agreed to underwrite the £37.5 million share offer – that is, if no existing shareholder buys any shares, Westbrook has undertaken to buy them all, giving it around 75 percent of the company.

It has stipulated that whatever happens, it must end up with one share more than 50 percent of the company. If existing shareholder demand would leave them with more than 50 percent, they will be cut back.

For the record, the share issue has been priced at 10.5 pence each, representing a 29.3 percent premium to the closing share price of 8.12 pence on 13 December, the day before the placing was announced. But Westbrook is no Santa Claus.

The management is extremely experienced and smart, which will not have escaped Westbrook’s attention

There are numerous opportunities here. The underlying assets, one can certainly argue, are worth more than the prevailing share price. The company’s current market capitalisation, it also could be argued, is determined by the underlying loans being in covenant breach, and the lenders have hamstrung the company so that it is unable to do anything apart from service the interest on those loans.

The equity raise will do something about this by paying down the loans, extending them out to the end of 2016 and will, for all intents and purposes, allow the company to function again.

The management is extremely experienced and smart, which will not have escaped Westbrook’s attention. The New York firm also will have discovered that the team at O Twelve has a pipeline of further investments –all they need is cash. With fresh equity at its disposal, O Twelve will have the chance to sell assets they have and reinvest the proceeds in growth assets. It also could get into a position where it could perform further equity raising once the debt is stabilised. What all this boils down to is a simple formula: Westbrook is buying in at what looks to be the bottom and thinks the company can be taken forward, with a commensurate rise in value.

At the same time, it has gone in and provided certainty so O Twelve can function again.