Blackstone pounces on troubled Valad

One of the largest private equity funds in the world, Blackstone, is in advanced discussions to buy troubled property group Valad in a deal thought to be worth up to $220 million.

The Wall Street heavyweight first submitted a takeover proposal to the trust’s board three weeks ago but Valad kept the negotiations under wraps until yesterday, when it emerged that Blackstone had acquired a substantial stake in the property group through the purchase of convertible notes owned by Kimco Realty Corp, one of the biggest listed real estate investment trusts (REITs) in the US.

Blackstone paid $165 million for Kimco’s remaining interest in the notes – $20 million less than their face value.

By deploying such strong-arm tactics, the private equity firm has forced itself to the top of Valad’s agenda.

According to a source close to the negotiations, the debt-saddled Valad, which has a market capitalisation of $134 million, has been courting other potential suitors in relation to a possible merger. But Blackstone’s acquisition of the convertible notes forced a capitulation from Valad’s board and the private equity house is now ranked as the group’s “preferred bidder".

Valad’s shares were placed in a trading halt yesterday and the Australian Securities Exchange-listed trust is expected to make an announcement on the buyout discussions today.

Blackstone’s swoop on Valad is part of what one analyst described as a “wave of investor interest" in Australia’s small-cap REITs, precipitated by the onslaught of the credit crunch. Hedge funds and private equity firms are swarming all over the sector in the hope they can exploit the lucrative gap between the smaller REITs’ pricing and their net tangible assets (NTA).

At the suspension of trading, Valad’s shares were worth $1.15, compared with their NTA of $2.32.

Blackstone’s proposal values the heavily geared property group at about $1.90.

If the private equity behemoth succeeds in its bid for Valad – regarded as one of the greatest casualties of the credit boom, with a ­market capitalisation that topped $3 billion in 2007 – it will be Blackstone’s first foray into the Australian property market.

Last February the Wall Street company shelled out $US9.4 billion for Centro’s US portfolio of shopping malls in what was one of the largest property transactions since the collapse of Lehman Brothers.

But the Blackstone offer also caps a turbulent period for Valad.

Last week the property group gave its outgoing chief executive, Peter Hurley, a controversial $1.9 million golden handshake after his management buyout proposal for Valad’s European business flopped in the face of fierce opposition from investors.

The trust has more than $6.4 billion worth of assets under management in Europe.

Before the Blackstone bid, Valad’s board had hoped to reduce the group’s $400 million debt mountain by selling various segments of the business, but those plans have been put on ice pending the outcome of the takeover discussions.

The transaction will take up to three months from its initial submission to shareholders and be subject to approval from the Foreign Investment Review Board.

Valad is being advised in the takeover discussions by the corporate advisory outfit Fort Street and by law firm Mallesons Stephen Jaques.

Blackstone has engaged US investment bank JPMorgan and lawyers Gilbert + Tobin.

The Australian Financial Review