Brookfield calls the tune for Songbird and Canary

CWG takeover allows Canadian firm to steer estate’s development, reports David HatcherREC 03.15 - 28

The takeover of Canary Wharf Group has been a triumph for its suitors, Brookfield and Qatar Investment Authority, and finally moves them from minority shareholders to where they want to be: in the driving seat.

The deal, first revealed by Real Estate Capital, is due to be completed imminently and sees Brookfield and QIA purchase Canary Wharf Group’s majority owner, Songbird Estates, for 350p per share, or £2.6bn, taking out shareholders China Investment Corporation, Simon Glick and Morgan Stanley.

Songbird’s management resisted the bid from the off, no doubt looking to drive up the price from the initial 7 November offer of 295p per share, but the deal’s instigators were confident of success from the outset.

Brookfield had long sought to rectify the messy structure of Canary Wharf Group (CWG), which was 69.37% owned by listed vehicle Songbird, with QIA, CIC, Morgan Stanley and Glick Entities Songbird’s major owners (see charts).

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Brookfield had owned most of CWG’s remaining 30.63% since a failed takeover attempt in 2004, but crucially, despite its large stake, had never gained representation on the Canary board. This meant it could not influence the company’s strategy or use its considerable property expertise – it manages $121bn of assets worldwide and develops and leases offices to the world’s biggest occupiers.

For several years the Canadian company had discussed a possible restructuring with other shareholders at every opportunity. QIA was the first to agree that a change would be appropriate, firing the starting gun to prepare a bid.

The duo’s combined financial clout meant they could see a high-stakes takeover through to the end; that a rival bid was most unlikely; and that if successful, they had the resources to exploit the development opportunities at Canary Wharf and keep the estate intact.

 Good shareholder relationship

Brookfield’s global presence also gave it relationships with the shareholders it was looking to buy from. CIC was an investor in Brookfield’s $5.5bn 2009 “Turnaround Consortium” which, among other deals, invested via warrants in distressed US retail giant General Growth Properties. Having bought into GGP close to the market’s nadir in 2010, CIC then sold its $1.4bn stake to Brookfield in late 2013.

CIC made a similarly canny investment in Songbird at the bottom of the market in 2009, and QIA and Brookfield were confident CIC would choose to make the same move as it did with GPP and cash in at a substantial profit, if the price was right.

Morgan Stanley was an even more obvious seller. The closed-ended fund that held its investment, Morgan Stanley Real Estate Fund IV, needed to liquidate. The fund, set up in 2004, had performed poorly, but this investment was a success for its investors.

Morgan Stanley had bought in initially in 2004 as part of the consortium that fought off Brookfield and established Songbird. It later increased its stake through an emergency recapitalisation in 2009.

More of a concern to QIA and Brookfield was Simon Glick, who had been part of a consortium that bought Canary Wharf in 1995 and part of the one that took it over in 2004. Glick is said to have been the most resistant in the Canary boardroom to allowing Brookfield to have any sway over the strategy of the company.

However, if CIC and Morgan Stanley were to sell, the hope was that Glick would be uncomfortable becoming a bedfellow with QIA and Brookfield and would be squeezed out, and so it proved.

Songbird’s management rejected the initial 295p bid and had the estate revalued. The new valuation, published on 28 November, implied a 19.2% rise in its net asset value to 381p per share.

But Songbird has some expensive debt and the valuation was not on a triple net basis, which considers a company’s worth not only if broken up and sold, but also its tax liabilities, debt and derivatives repaid, and all liabilities settled. Analysis by research firm Lazarus showed the triple net asset value would cut the price by 53p per share.

 Final bid gains traction

The bidders’ final offer of 350p per share, on 4 December, at a premium to triple net asset value, gained traction with smaller investors such as Third Avenue Capital, Madison International and EMS Capital. No rival bid was forthcoming, and one day before the 29 January deadline, CIC, Glick and Morgan Stanley accepted the offer.

Ric Clark
Ric Clark

On 13 February, eight members of the Songbird board associated with the sellers resigned and three Brookfield senior managing partners were appointed: global real estate head Ric Clark (who now also sits on the CWG board); Brookfield Europe chief executive Jon Hick; and Brian Kingston, president and chief investment officer of Brookfield’s global real estate group.

The board also includes three Qatari representatives and former Songbird company secretary John Garwood. CWG is led by chairman and chief executive Sir George Iacobescu (see below).

Brookfield has always opposed the board’s sale of assets, believing the 14m sq ft estate is worth more than the sum of its parts; CWG manages the whole and owns 8m sq ft.

Sovereign wealth fund QIA, meanwhile, bought the HSBC tower for £1.1bn at the end of last year and also owns Credit Suisse’s 1 Cabot Square headquarters and a 20% stake in 10 Upper Bank Street. Brookfield owns 20 Canada Square. These assets could be integrated following the takeover.

The board sold assets partly to fund development, but given the new owners’ capital resources and access to cheap credit, they will not need to make any more disposals.

Canary Wharf has a costly 9.82m sq ft development pipeline, including establishing a residential hub with its 3,100-home Wood Wharf project, which is expected to be given an extra boost when Crossrail becomes operational in 2017.

The saga of Canary Wharf’s ownership since its establishment in the 1980s is about to enter another chapter, and given the development opportunities on the estate and its cash-rich new owners, it is likely to be at least as interesting as the others.

Experience counts for Docklands veteran

The fact that Sir George Iacobescu, 69, will continue to be Canary Wharf’s chairman and chief executive is partly down to his historical ties with Brookfield, as well as his unrivalled expertise.

Sir George Iacobescu
Sir George Iacobescu

Iacobescu began working for the Reichmann family’s Olympia & York in Canada in 1978, three years after leaving his native Romania. He moved to London in 1988 when Olympia & York embarked on Canary Wharf’s development, to oversee its construction.

Olympia & York went into bankruptcy in 1992, but Iacobescu stayed on at Canary Wharf while it was in the control of its banks.

A consortium put together by Paul Reichmann bought the estate in 1995 and when Brookfield made a bid for the company in 2004 it received backing from Reichmann.

Brookfield and Reichmann failed to take control, losing out to Morgan Stanley and Simon Glick. The Reichmanns sold their stake to Brookfield.

However, the following year in the US, Brookfield and the Reichmanns undertook a corporate deal of their own: Olympia & York Properties was sold to Brookfield for $1.6bn.

Iacobescu was integral to the development of much of the portfolio Brookfield bought, including the 1.6m sq ft World Financial Center in New York, now Brookfield Place and the company’s US headquarters.

Several top former Olympia & York, and now Brookfield, executives, including global head of real estate Ric Clark, are former colleagues of Iacobescu.