EUROPE NEWS: Three’s the magic number

Last month, Toronto and New York-based Brookfield Asset Management and Qatar’s sovereign wealth fund, Qatar Investment Authority (QIA), had their £2.6 billion (€3.5 billion; $4 billion) offer for Canary Wharf’s owner, London-listed property developer Songbird Estates accepted.

The completion of the deal is most likely the fulfillment of a decade-long ambition of Brookfield, having first tried to take over the company back in 2004 when a Morgan Stanley Real Estate Investing-led consortium won control of the Canary Wharf Group. That initial bidding war emanated from financial difficulties for Canary Wharf. Morgan Stanley came out on top when it put together a consortium to create Songbird consisting of capital from Morgan Stanley’s 2004-vintage Morgan Stanley Real Estate Fund (MSREF) IV, a stake from New York-based investor Simon Glick, as well as the Whitehall 2001 Funds, a Morgan Stanley special situations fund, Princes Gate Investors and British Land Joint Ventures.

As of 2008, Morgan Stanley had made back all of its initial investment plus profit without having sold a single share, according to a source familiar with the matter. But, by 2009 Songbird ran into difficulties again when an £880 million Citigroup loan, secured against Songbird itself, was running expiring and the principal due. Round two of the Brookfield/Morgan Stanley bout saw the Toronto-based firm try to buy the loan from Citi, in a bid to take over Songbird, and according to one source close to the matter actually believe they had a handshake deal with the bank. Morgan Stanley in response sought out QIA and also the Chinese sovereign wealth fund, China Investment Corporation, to subscribe and underwrite an issue of ordinary and preference shares alongside itself and Glick. This resulted in the recapitalization of Songbird for 100 pence a share.

Since 2009 the UK’s slowly recovering economy and a move to diversify the Canary Wharf estate by creating more residential space as well as restaurants and retail alongside some acquisitions increased the attractiveness of Canary Wharf, and ultimately Songbird. So, late last year Songbird announced that it had been approached by Brookfield and QIA about buying up the Songbird shares QIA did not already own, but the initial price of 295 pence per share was quickly rebuffed. So rather than negotiate with the Songbird board, QIA and Brookfield decided to launch a hostile tender offer. To make this successful the pair needed support from shareholders, which they got from New York-based real estate fund manager Third Avenue Management, which was the largest shareholder (outside of Morgan Stanley, CIC, QIA and Glick). Third Avenue struck an “irrevocable undertaking” where the firm would agree to tender its block of shares to the bidders for 350 pence per share. Once that deal was agreed QIA and Brookfield took that offer out to the rest of the shareholders. The company then announced that Morgan Stanley, CIC and Glick would support the deal and it was third time lucky for Brookfield.

So turning a 100 pence per share recapitalization into a 350 pence per share sale has meant that Morgan Stanley and CIC have made returns of more than 3x their money. Certainly an outstanding result for investors in MSREF IV, a fund that is more than ten years old and well out of life.

But, does that mean that Brookfield has over paid for control of Canary Wharf? When QIA and Brookfield made their offer in December the 350 pence per share bid was final, meaning know scope for negotiation. This effectively permitted Songbird to discuss with other large investors who might be interested, and who would know if they beat 350 pence per share Canary Wharf was theirs as they were not getting into a bidding war with Brookfield and QIA. In the end no one was able to step up to the mark and rival the bid – the market had spoken.

However, multiple market sources did say that the final price wasn’t too high for Songbird and that it’s a “win-win” for both sides. One source points to the latest approval of the additional developments of Canary Wharf, such as planning permission to construct 30 buildings, comprising 4.9 million square feet of homes, offices and shops, at Wood Wharf and the planned Cross Rail which will vastly improve transport to the estate. “There is plenty of meat left on the bone,” the source added.

The sources add that Morgan Stanley has shown that Canary Wharf can make money even in a downturn. So for those that say Brookfield and QIA paid at the top of the cycle, that may well be the case but an asset like Canary Wharf is always going to be difficult to get a hold of so it makes sense to go for it when you the chance. Time will tell if Brookfield’s pursuit of Canary Wharf was worth it.