Covent Garden's Owner Makes a Smart Move on Soho

(Bloomberg Opinion) -- In the depths of Britain's Covid-19 crisis, investors decided the pandemic would halve the stock-market value of commercial real estate in London's West End as they feared for the future of the world's great shopping and tourism destinations. Now the owner of Covent Garden is snapping up a big stake in its Soho neighbor. It's a shrewd financial and strategic move.

Capital & Counties Properties Plc (Capco) is paying 436 million pounds ($540 million) for 26% of Shaftesbury Plc, acquiring the stake from Hong Kong property tycoon Samuel Tak Lee. For now, this is just a passive financial investment. But there's evident logic in a full merger of the two companies' estates covering London's “theater land” and some of the city's best-known retail and leisure districts.

The investment uses much of Capco's carefully harvested borrowing capacity and could prove ill judged if Britain, and London in particular, suffers further waves of the novel coronavirus. That said, the price, 41% below Shaftesbury's share price in mid-February, already assumes a severe degradation in rents. Social-distancing measures imposed by the pandemic will hit retail and leisure this year and probably next; new remote-working habits may also stick. But the idea that worker and visitor numbers in these prime London areas will fall lastingly looks pessimistic.

Meanwhile, Capco gains a blocking stake that could thwart the ambitions of any other buyer with designs on Carnaby Street and other Soho landmarks. If Capco tries to nab the rest of the company, Shaftesbury's board will struggle to pull in friendly counterbidders to push the price up. For Ian Hawksworth, Capco's chief executive officer, the potential benefits appear to justify the risks.

But Capco's gains come at the expense of Shaftebury's minority shareholders. True, the stake-seller Lee was suing the company over a fundraising in 2017, and this dispute with the main shareholder was a distraction. But having Capco, your main rival and potential merger partner, gaining a blocking stake is arguably worse.

Shaftesbury could have avoided this by snapping up Lee's shares itself, effectively conducting a massive buyback — or stage-managing the distribution of all or part of the stake to its existing shareholders. But that would have required a common approach between the seller and the company, which would have been hard with the backdrop of litigation. The lawsuits have now been dropped.

A full merger is the logical next step. The seemingly weaker position of Shaftesbury shareholders is at least mitigated by the significant overlap in the two registers, with Norway's Norges Bank acting as kingmaker with 15% of Capco and another 26% of Shaftesbury. But Shaftesbury's board has other investors to look after too.

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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.