ECM takeover bid points to 'development Darwinism' for real estate
By Stephan Delbos Staff Writer, The Prague Post
November 26th, 2008 issue
An international private equity group’s recent takeover bid for a Prague-based real estate development firm will be the first in a series of buyouts, as investors scramble to cash in on low share prices in the property development industry, which has been on shaky ground since the U.S. market crash in September, say analysts.
ECM Group made an offer of 303 Kč ($15) per share to shareholders of ECM Real Estate Investments (REI) Nov. 14. ECM Group already owns 30 percent of ECM REI and hopes to acquire a controlling stake in the company, which has been devastated this year by stock losses totaling more than 75 percent. The bidding developed further Nov. 21, when ECM REI announced the issuance of 2 million shares at 44 Kč by the end of this year. Entrepreneur Milan Janků, who owns ECM Group and is also chairman of the board at ECM REI, immediately responded by offering to buy all of the shares at 303 Kč per share, which would earn ECM REI 606 million Kč. ECM Group hopes that the original bid, which expires Dec. 12, will help re-establish EMC REI’s stability. However, some analysts say Janků’s bid reflects his shrewdness at buying up stocks in an industry that, although battered, is bound to improve with time.
“It’s a very opportunistic bid, and the motivation could be to exploit the low share price and get a higher stock in the company,” said Patrick Vyroubal of Atlantik FK. “I see it as a low offer, because it’s about 31 percent below the six-month average of the share price.”
Snapping up shares
According to Vyroubal, the takeover bid has had a short-term stabilizing effect on ECM shares, which have leveled off to just below 300 Kč.
If the bid runs out unsuccessfully, shares will most likely fall. It is now up to shareholders to decide whether they want to get out of their investments before prospects get worse, or if they will hold out for better times.
“It’s a difficult question for shareholders,” said Vyroubal. “It’s a low bid, but in the future the market could get worse.”
The takeover bid came as a relief to some shareholders with negative outlooks for the property industry, which has been crippled by Czech banks’ increasing unwillingness to lend to investors and developers, and by public panic, which has caused extreme fluctuations across the PX Index.
On Nov. 19, the ECM REI board encouraged shareholders to accept the bid, which offered an 11 Kč profit per share.
“According to the company, the takeover should stabilize the shareholder structure and prevent the company from being taken over [by other companies],” said Jiří Kašek of ECM. “The offer supports the company’s long-term strategy,” he added.
Analysts say takeover bids will soon be the norm in the property development industry, which has deteriorated rapidly over the past three months after a decade of phenomenal growth fueled largely by foreign investment. With share prices lower than ever, savvy investors could begin to snap up shares which will inevitably gain in value.
“This is development Darwinism. Most likely we’ll see more of these purchases across the board, and we’ll see more strategic partners taking stakes as the discounts continue,” said Angus Wade, managing director of King Sturge, a property consulting firm. “There are many people out there with cash who will be looking to get a bigger share in companies they believe in.”
Property development firms, whose profits are based primarily on speculation, often rely on banks for up to 70 percent of funds for building projects. As banks have become more stringent in lending over the past three months, even large property firms like ECM and Orco have been forced to shelve projects for lack of funds. With banks now virtually unwilling to administer loans, the property market sits at a deadlock. Once banks start lending again, analysts expect that the property market will begin recovering.
“This is a crisis caused — and now controlled — by banks,” said Wade. “Banks are the catalyst to recovery. When they start lending again, people will start buying again.”
Some analysts are optimistic that the speed of the industry’s downturn will allow for an equally quick recovery. Year-end audits at the close of 2008 should increase transparency throughout the banking sector. Many hope this increased transparency will increase trust among banks and encourage banks to begin lending again, both on the interbank industry and to the public.
“Banks have to lend to each other — that’s their business,” said Wade. “They will hopefully free up interbank lending, and by April or May, we’ll start to see some transactions coming out.”
Real estate and development is not the only Czech industry that has been devastated by the credit crunch, but the Czech National Bank and the Finance Ministry have remained optimistic about what they call the minimal effects of the world financial crisis on the Czech economy.
However, CEE economies like the Czech Republic, which are heavily dependent on foreign investment and exports, are inextricably tied up with foreign economies, said Wade. With the European Central Bank predicting a deep recession throughout the European Union in 2009, Czech industries are sure to feel the pinch.
“We didn’t have time to build up enough to become an investment hub that would offer a certain degree of protection,” he said. “We are not an island. We are at the mercy of Western Europe.”
Stephan Delbos can be reached at mailto:sdelbos@praguepost.com