THE GOOD, THE BAD AND THE UGLY: The Good

When MGPA informed Akeler executives that it had decided to sell the UK business parks platform to Australian logistics heavyweight Macquarie Goodman, the decision initially met with disappointment.

James Cole, Akeler's chief executive at the time, recalls the period. The market was just recovering from the dot.com crash and Akeler was two years into an ambitious five-year business plan to evolve from a pure developer to a business with asset and fund management capabilities. But when MGPA informed Cole and his three-strong board that it had achieved a three times return on its equity in the business, the response was: “Okay, where we do we sign?”

MGPA's sale of Akeler to Macquarie Goodman, subsequently rebranded Goodman Group, took place in November 2006. It was a time when UK developers, confident of accommodating the next big corporate letting, were spewing out speculative developments across the country. Leverage was plentiful and, for those with healthy relationships with their lenders, cheap. For Goodman, it was the third of four corporate acquisitions that marked its rapid expansion into Europe, and a deal that enabled the Australians to combine the UK's number one business parks outfit with the number two. Goodman's other purchases comprised Akeler's rival in the business parks space – Arlington Securities – in December 2005; the European logistics firm Eurinpro in May 2006; and the UK logistics developer Rosemound in April 2007.

MGPA sold Akeler to Goodman for £649 million (a deal now worth about €745 million, or $1.05 billion), a price which Cole described as “valuing everything on a best-case scenario”. Within that price, £600 million was for assets in 14 locations, much of which were in the business parks-heavy Thames Valley area, west of London. MGPA effectively sold 1.75 million square feet of built space or space under construction and options on land for a further 5.2 million square feet of developments. A small proportion of this development programme was in continental Europe.

The deal marked the largest profit for a single disposal from MGPA's Fund I, a $529 million fund originally managed by Australian listed property group Lend Lease before current MGPA chief executive Jim Quille led a buyout of its management company in February 2004. As well as returning more than two times equity to investors once fees were taken out, it also recorded an internal rate of return of more than 20 percent.    

At the time of the dot.com fallout, investments into the Thames Valley, particularly into business parks, caused a lot of eyebrows to be raised.

Andrew Wood

For MGPA's chief investment officer Andrew Wood and chief executive officer for Europe, Alex Jeffrey, the sale was instrumental in helping the fund, a 1999 vintage, hit its overall target return. Wood and Jeffrey are keen to stress that the fund, which is in the final stages of winding up with its last asset under offer, lived through the dot.com crash and that the purchase of Akeler in 2002, its comprehensive restructuring and then eventual sale four years later, reflected a classic countercyclical play.

“At the time of the dot.com fallout, investments into the Thames Valley, particularly into business parks, caused a lot of eyebrows to be raised,” Wood recalls.

Secure capital

MGPA acquired Akeler for £280.5 million in 2002 from Security Capital European Realty, a private equity real estate investor 65 percent owned by institutions, with the balance held by Chicago-based Security Capital. The deal used up $198.2 million in equity from Fund I (denominated in US dollars), equal to more than a third of the vehicle's total.

Wood says the outlay was worth it for three reasons. MGPA regarded Akeler's concentration of assets in the Thames Valley, an area with a high vacancy level following the tech crash, an attractive proposition, anticipating the lack of tenants to be a temporary blip.

“We also liked the diversity of the business,” Wood adds. “This was not only a development business with assets but it also had very strong build-to-suit capabilities and a strong land bank secured with a number of options to buy.”

The third draw for MGPA was Akeler's existing relationships with public sector bodies and contractors. Of the former, Woods recalls strong ties with parties including the Scottish Land Authority and Manchester City Council, leading to preferred developer positions for Akeler when sites became available.

Jeffrey says the froth on the investment was the potential to revamp the management team into an outfit capable of asset and fund management. He says: “We saw value in the platform over and above the sheer asset value in terms of leasing up vacant space. We saw the platform could eventually generate fee revenue.” By September 2005, Akeler was close to creating a fund that it would turn into a REIT and list on the London Stock Exchange. Jeffrey said part of MGPA's sale story to Goodman was this metamorphosis.

We saw value in the platform over and above the sheer asset value in terms of leasing up vacant space. We saw the platform could eventually generate fee revenue.

MGPA Europe CEO Alex Jeffrey

Nodding to the five-year business plan, Jeffrey said at the time of the sale to Goodman, the platform was successfully taking shape largely because of an incentivised management structure which saw the main board invest in schemes from their own pockets alongside Global Fund I. In addition, incentives were introduced to ensure all staff were rewarded. That incentive programme followed two years after MGPA bought the Akeler platform and after the London-based firm influenced a management restructuring effort. The then-chief executive Trevor Silver and senior manager Stephen Morgan departed, to be replaced by a quartet including chief executive Cole, chief financial officer Nigel Pope and executive directors Patrick Going and Marcus Boret. Cole recalls how keen Akeler's leadership was to install the new incentive system: “We believed that everyone in that business added to that business, from the receptionist to the chief executive.” As a result, according to one source close to the sale, the 35 Akeler staff divvied up a windfall of more than £20 million while the four directors netted an approximate extra £9 million between them.

Too many chiefs

Goodman opted not to finalise the fund platform grown by MGPA and Akeler. Having already inherited the Arlington Business Park Partnership fund from the Arlington purchase, it structured the Akeler deal so that the fund, of which Legal & General, PruPIM and the Abu Dhabi Investment Authority remain major unit holders, would buy the properties for £600 million, and Goodman itself would buy Akeler's three European assets and Akeler's management for £49 million.

Cole says: “They were more interested in the assets than the personnel as they didn't tie us in at all.” He says embedding the Akeler team with the ex-Arlington team was always going to be tough. According to a source close to Goodman, only three of the 35 ex-Akeler staff, including current chief financial officer for Europe Pope, are still with the firm.

“At the time of the dot.com fallout, investments into the Thames Valley, particularly into business parks, caused a lot of eyebrows to be raised.”

Another person close to the deal says Goodman already had the skill base to cope with the assets inherited from Akeler. “There were some great people at Akeler but they were always going to have issues working in a bigger organisation.”

He adds: “At the time it didn't seem to be expensive. Clearly with the benefit of hindsight [Goodman] could have got it cheaper if [it] had hung on in there. Anyone who sold out of property between the second quarter 2006 and the second quarter 2007 should feel pleased with themselves.”

Wood, Jeffrey and MGPA certainly are pleased with how their classic countercyclical investment played out.