Brixton fairly valued by SEGRO offer;
proposed merger offers modest upside
􀀗 Downgrading Brixton to Neutral (V) from
Overweight (V) and reducing target
price to 43p from 80p
􀀗 SEGRO share price underestimating
recessionary impact on industrial
occupier market. Reiterating UW (V) on
target price reduced to 21p from 24p
(adjusted for the rights issue)
Potential value from REIT merger
SEGRO’s offer sets ceiling on Brixton value
SEGRO’s proposed 1.75x share for share offer for Brixton
(GBP122m, 45p per share at close 29 June price) is unlikely
to be exceeded, in our view. SEGRO’s indicative offer
equates to a 9.0% initial yield, on a portfolio 23% vacant and
71% located in Heathrow and Park Royal.
We see limited alternatives for Brixton’s shareholders, and
we believe that Brixton’s bondholders, who constitute the
principal risk to the transaction, are unlikely to oppose it,
and accept a covenant waiver fee instead.
SEGRO’s income returns are overvalued
Our 21p DCF valuation and target price for SEGRO projects
19% downside to the 26p share price. Our Underweight (V)
rating is supported by the prospective 5.4% dividend yield
which is, in our view, insufficient to compensate investors for
the continued risk of occupier contractions in both the UK and
continental Europe and associated vacancy costs which we are
forecasting to reduce underlying profits by 13% to 2010e.
Opportunities for synergies on merger proposal
We believe that SEGRO is the potential acquirer best suited
to extract value out of Brixton’s portfolio. We estimate that
at the offer price, the acquisition would be both earnings
(20%) and adj. NAV enhancing (7%) from 2010 as a result
of a projected GBP10m annualised cost synergies and the
47% offer price discount to our forecast of Brixton’s trough
adjusted NAV of 85p.