The largest shareholder of the largest landlord to Australian Leisure & Hospitality (ALH) made an unsuccessful takeover bid on Wednesday.

The ASX-listed ALE real estate investment trust (REIT) consists entirely of a $900 million portfolio of properties, exclusively rented to Australia’s largest publican, the 75 per cent Woolworths-owned ALH.

Already owning 25.84 per cent of ALE, Sydney-based Caledonian (Private) Investments on Wednesday evening bid $3.95 per stapled security for all remaining shares, amounting to a premium of nine per cent on the day’s closing price, and a valuation of $773.4 million.

The news saw the share price premium almost immediately absorbed at opening of trade on Thursday, as ALE’s managing director Andrew Wilkinson issued a resounding ‘no thanks’.

“The ALE Board believes an offer for ALE’s securities at $3.95 per security would significantly undervalue ALE and accepting such an offer would not be in the best interests of ALE securityholders. On this basis, ALE has advised Caledonia that it will not be progressing the Proposal.”

Possession of the blue-ribbon ALH-leased freeholds has become something of its own investment class, as the operator of over 330 pubs has steadily sold off its bricks and mortar in recent years.

The largest of these was last year’s $600 million acquisition of 54 pubs leased to ALH by the Charter Hall and Hostplus-formed Long WALE Investment Partnership (LWIP), which has gone on to see another incarnation this year with LWIP 2.

But the glaring deficit between ALE’s net tangible asset value of $2.27 per security versus the current and ongoing stock price, brings into question the reasons behind the board’s assessment and decision.

The answer seems to lie in a combination of rent and land potential, with the entire portfolio considered to be “under-rented” to ALH. Leases allow a rental review in another two years of up to 10 per cent, and an uncapped review in 2028. Analysts suggest this could be worth another $250 million.

There are a number of the properties that are also considered to have underlying property development potential, as the trend of mixed use development of commercial sights, particularly hotels, continues around the country.

“ALE continues to assess a number of opportunities designed to further grow distributions and securityholder value in line with its consistent strategy,” said Wilkinson’s statement.

Woolworths itself remains one of ALE’s largest shareholders, effectively hedging its bets in sale and lease-back strategy, but while it purchased almost 20 per cent of ALE in 2008, it has even scaled this back, currently owning only 8.7 per cent of its landlord.

“We are not long-term property assets holders,” a Woolworths spokesman told The Australian.

Investment fund Allan Gray holds a similar stake in ALE, of 7.8 per cent. As ALH freeholds continue to sell at or below six per cent yield, Allan Gray managing director Simon Mawhinney believes the board should explain its decision.

“I don’t think it’s unreasonable for shareholders to expect the board to be more transparent on the assumptions they use when it comes to knocking bids like this.

“How much below a fair value is this in the board’s view? What are we giving away if we take the money now versus what we’ll get if we hold on for the next 12 years?”

Financial Property

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