Lend Lease Corporation is basically bailing out its 43%-owned associate, Lend Lease Primelife because of an approaching debt crunch.
Lend Lease said yesterday that it plans to acquire the rest of the aged care group for $170 million.
Lend Lease currently owns 43.2% of Primelife, a retirement homes and seniors accommodation provider.
Under a scheme implementation agreement, Lend Lease said it would acquire all of the securities it does not already own in Primelife for 31 cents each.
The total outlay is about $170 million, which Lend Lease said would be funded from existing cash reserves and/or debt facilities.
The company will also assume Primelife’s outstanding debt obligations, it said.
And there’s the key to the deal that saw Lend Lease shares lose 2.6% to $10.48 yesterday.
"Lend Lease believes the transaction represents an attractive outcome for Primelife security holders as it enables them to realise a certain value in cash for their securities at a substantial premium to recent trading levels.
"Primelife remains highly leveraged and had bank debt of A$460 million as at 30 June 2009.
"Primelife is required to reduce its bank debt to A$350 million by June 2010.
"Lend Lease believes that reducing leverage through asset sales or raising capital in the current environment is likely to further erode security holder value and is not in the best interests of Primelife security holders."
That’s confirmation that the company may have been forced to sell off more assets than it had to in an effort to raise the cash to repay the debt; or there was the possibility that it might not be able to do so, thereby forcing lend Lease into a quick bid.
Lend Lease is in fact doing it now, rather than waiting.
"The acquisition is in line with Lend Lease’s strategy to increase the Group’s exposure to the retirement sector and meets Lend Lease’s investment return criteria.
"The transaction is expected to be accretive to future earnings. The total capital outlay associated with the acquisition of Primelife securities is approximately A$170 million which will be funded from existing cash reserves and/or debt facilities.
"Lend Lease will also assume or refinance Primelife’s outstanding debt obligations.
"The transaction will increase the Group’s gearing from approximately 3% of net debt to total tangible assets less cash to approximately 9% (based on a pro-forma 30 June 2009 balance sheet)."
In a separate statement to the ASX, Primelife said the independent directors intended to recommend unanimously that security holders vote in favour of the scheme.
"The independent directors consider the proposal provides an opportunity for all Lend Lease Primelife (LLP) securityholders to receive for their LLP securities a premium to net tangible asset backing and a material premium to the recent market price," Primelife said.
Lend Lease acquired the major shareholding in and management rights for Primelife in late 2008. The company was formerly known as Babcock & Brown Communities Group.
As much as anything, Lend Lease’s pragmatism is recognition that the property sector remains fragile, especially in the way it is viewed by lenders and investors.
