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What better place to test the health of the UK property market than a doctor’s office? A takeover battle for NHS landlord Assura — which involves a private equity bidder slugging it out with a listed competitor — has renewed the debate over the future of the City of London.
Assura, which owns a portfolio of mainly GP surgeries and healthcare centres, seemed set to become the latest in the procession of UK companies taken private after it agreed in April to a £1.6bn bid by KKR and Stonepeak. Now, however, the FTSE 250 group is considering an alternative offer from its closest competitor, Primary Health Properties. Both are offering a price close to Assura’s net asset value, but PHP’s bid — at present worth about £1.7bn — would be paid mostly in shares.
The choice facing the board and investors looks at first glance like a test of confidence: cash out now after years of underperformance, or fight back against the procession of UK take-privates with a bet on future growth. But the reality is not as cut and dried.
KKR says PHP is underplaying the risks of a combination, which indeed adds to the risk of accepting equity. The cost savings from a merger, which PHP pegs at £9mn a year — worth about £80mn as a lump sum, Lex reckons — look scant.
On the other hand, PHP argues that KKR is swooping in to buy Assura on the cheap just as the industry turns a corner. That, too, checks out. Assura’s shares have been particularly weak, but stocks across the sector had been weighed down by high interest rates. The mood is shifting, though. The FTSE EPRA Nareit UK Total Return index is up 9 per cent in the year to date, ahead of the 4 per cent rise in the broader FTSE 250 on a total return basis.
PHP’s main problem is that KKR’s cash offers certainty and optionality. After all, if the entire sector is undervalued, an investor can always take the quick win on Assura and reinvest their funds in another cheap real estate investment trust, as a way of riding the rising tide twice over. They would also be spared the execution risk that comes with PHP’s plan to sell Assura’s private hospitals.
One way to clinch the argument might be for PHP to offer more cash itself. Should it do so, its investors are likely to be forgiving. PHP’s shares are up about 10 per cent since February 13, suggesting investors see more potential for value creation than the meagre stated cost savings indicate.
Whoever wins, KKR has done the real estate sector a favour. It has nudged investors to start reconsidering the value of UK property assets that, for a long time, looked distinctly under the weather. The perception of rising valuations, and a mergers and acquisitions market that is once again showing signs of life, could get the rest of the sector on the mend too.
