FAIRVEST Property Holdings, which plans a share swop merger with Arrowhead Properties, has proposed the acquisition of its outsourced management company New Star Asset Management for R133 million, rather than renew the term for five years.
The 10-year agreement between Fairvest and New Star was approved in 2011 and expires on November 30, 2021, but it could be renewed for a further five years, subject to shareholder approval.
Renewing the lease, however, would not be fair to shareholders, according to an appraisal by professional services firm Mazars Corporate Finance.
If the asset management agreement was not renewed, Fairvest would become obliged to acquire the business conducted by the asset manager.
Fairvest said in a statement yesterday that if the share swop deal proceeds, its market capitalisation will increase the asset management fees in terms of the asset management agreement, and would likely also increase the cash that would ultimately become payable on internalisation of the asset management function.
Fairvest said an independent board committee had found that it was likely that a single-step merger with Arrowhead would become conditional on the internalisation of Fairvest’s asset management.
No member of the independent board had conflicting interests regarding the asset manager. The board committee comprised the directors Louis Andrag, Khegu Nkuna, Ndabezinhle Mkhize, Jacob Wiese and Trevor Cohen.
The independent board recommended that shareholders approve the internalisation of the asset manager at a distributable earnings neutral cash price that an independent expert had confirmed was fair, failing which that the asset management agreement be renewed for five years to ensure continuity of asset management, albeit on an outsourced basis.
They said that internalisation would better align the interests of the company’s management and shareholders.
From internalisation date, Fairvest chief executive Darren Wilder would be employed directly by Fairvest, for not less than 24 months. Fairvest’s chief financial officer, Jacques Kriel, would continue to be employed directly by Fairvest.
If Fairvest shareholders did not approve the internalisation, the asset management agreement would terminate unless renewed.
The board appointed Mazars Corporate Finance to provide a fairness opinion, and Mazars had found the internalisation proposal to be fair, while the terms of the renewal of the agreement were deemed to be unfair to shareholders.
The monthly asset management fee is equivalent to 1/12th of 0.5 percent of the aggregate market capitalisation and borrowings of Fairvest.
“The purchase price is forecast to be neutral to the forward distributable earnings of Fairvest.”
In terms of the share swop agreements between Arrowhead and Fairvest, the intention is for Fairvest to acquire a majority of B ordinary shares in Arrowhead Properties in exchange for Fairvest shares, based on a swop ratio of 1.85 Fairvest shares per Arrowhead share.
BUSINESS REPORT ONLINE