Spazio to ‘revise’ Pirelli Real Estate’s external management contract

Shareholders in light industrial property investor Spazio Investment, which include prominent hedge fund GLG Partners, are forcing a shake-up of the company leading not only to accelerated asset disposals and a halt to new acquisitions, but the alteration to incentive fees for external asset manager, Italy’s Pirelli Real Esate.

Shareholders in Spazio Investment, Europe’s second largest industrial property company, are forcing it to sell €450 million ($659 million) of assets, freeze further acquisitions and change the fee arrangement with external manager Pirelli Real Estate.

Spazio, which owns around €730 million of property in Italy and whose shareholders include prominent hedge fund GLG Partners, outlined details of the plan today.

The company said it had recently held extensive and constructive discussions with a number of major shareholders who “expressed a strong desire for revisions of Spazio’s strategy”.

As a result, the board proposes not just selling €140 million of property this year, but €450 million over the next three years despite what it characterised as the “challenging” situation in the real estate and financial markets.

It will also put a freeze on further acquisitions unless they are exceptional opportunities and cancel deals where it has the first right of refusal. Further, it will alter the fee arrangement of its external manager which should lead to lower remuneration for Italy’s Pirelli. As part of the change, Pirelli will be compensated based on the euros per share distributed in cash to shareholders, the company said. It added that as a result of disposals and return of capital, Pirelli’s fees are expected to be lower than if net proceeds from disposals were re-invested or retained. However, the new contract allows Pirelli to pursue investments for other companies without offering them first to Spazio.

Shares in the Netherlands-registered company, which began trading on London’s Alternative Investment Market in 2006, fell nearly 3 percent to £8.49 per share by midday today. They were trading at above £12 a share a year ago.

The biggest individual shareholder is Pirelli with 18 percent, which along with private equity real estate firm Cyprus Grove, took Spazio public. The second largest individual shareholder with 15.7 percent is London-based Laxey Partners, an activist fund that has been at the forefront of calls for a shake-up. Other significant shareholders include hedge funds GLG Partners and KDA Capital, US firm Artisan Partners, Boston-based Wellington Management, Carmignac Gestion and Fidelity.

The acceleration of the business plan and changes to Pirelli’s incentive scheme will be put to vote at an extraordinary general meeting next month. Though asset sales are being accelerated, the board insisted the “orderly disposal” would create shareholder value in exploiting the gap between asset valuations and the share price.

Spazio’s board has asked Pirelli to identify assets with limited opportunity for value creation in the short to medium term.

The company said the three-year disposal target was achievable but challenging, adding that the Italian real estate market had so far performed relatively well with other European markets.