Gecina

20/04/2009

When French REIT Gecina merged with Spanish property giant Metrovacesa in 2005, few could have predicted the complicated saga that would ensue

It had become something of a farce in Madrid.Cartoonists, analysts and Spain's financial press have all dined outon the saga that is the split betweenGecina, France's second-largest real estate investment trust (REIT), and Metrovacesa, Spain's largest property firm.

This month, prior to a final agreement to abandon the split, one Spanish business paper, Negocio, jokingly predictedin a cartoon that the already drawn-out separation would continue until 2025. Spaceships and robots circled as a desperate cry came out of Metrovacesa's office headquarters for medication.

Just days before Spain shut down for the Easter break this month, the two companies, which merged in 2005, were once again in the spotlight. Ameeting on 7 Aprilsaw 11 independent Gecina committee members advise the board on the next scene in a drawn-out split, which dates back as far as February 2007.

With the advice of Calyon and UBS, a unanimous decision was taken by 15 board members present to drop the split, which Gecina said was "an unacceptable situation", for good. JPMorgan analysts said it was unsurprising that Gecina had called off the split.

The significant six

The writing was on the wall in December last year, when the separation was postponed after six banks took control of debt-ridden Metrovacesa. That left its owner, the Sanahuja family, with little control over strategyor, indeed, over the Gecina split that was first agreed two years ago.

Decisions are now influenced by those six creditor banks:BBVA, Banesto, Banco Popular, Banco Sabadell, Santander and Caja Madrid. The deal would have seen Metrovacesa sell its 26.9% stake in Gecina in return for almost €1.9bn of Paris property.

An uneven swap of that stake for assets in the relatively stable French capital was the issue. Gecina's current market value is around €2bn. Metrovacesa's stake, therefore, is worth around €500m.

Tumbling property values and an even greater fall in share prices meant the deal, first drawn out in 2007, did not look so good in the spring of 2009. In brief, Gecina shares have fallen much more than those Paris properties, which in early 2007 were worth a gross €2.3bn. Gecina shares were trading at €64 on 6 Januarythis year, compared with€95 this time last year and the current level of around €35.

Running saga

Those who followed the running saga know that it was as much about the people involved as the companies, with the main protagonists being billionaire Gecina chief executiveJoaquín Riverohis ally, board member Bautista Solerand the Sanahuja family, led by Roman Sanahuja.

That may be true. But trying to finalise a split in a downturn was clearly not so straightforward. Analysts even went as far as suggesting the current wrangles could impact on investor confidence, a view taken byStandard & Poor's credit analyst Pierre Georges. The ratings agency had downgraded Gecina as a consequence of the lengthy search for a separation agreement.

In less stormy waters, the split package would have been good for both sides. It would have provided Metrovacesa with the chance to counter its exposure to the residential sector through those Paris assets. Nevertheless, retaining its stake in Gecina should provide it with some cash. Last year, Metrovacesa received €126m in dividend payouts from Gecina.

Future decision-making

Influence on future Gecina decision-making may prove tricky, though, given the involvement of the banks. In the eyes of Gecina, the Metrovacesa thatpreviously signed the agreement is not the Metrovacesa thatexists today. Rivero and Soler hold a combined 31% stake in Gecina, while Crédit Agricole's insurance subsidiary, Predica, has 8.2%. The rest, barring Metrovacesa's 27%, is freefloat.

For Gecina, handing over assets to the Spanish property company would have meant Gecina's debt covenants being broken. For now, Metrovacesa has stated it will consider the decision before making any further statements. The initial 2005 merger of Gecinaand Metrovacesa, in hindsight, may now seem untimely.

"Timing was not the problem," explains Gecina spokesman, Juan Carlos Calvo. "Together with legal issues, the merger got complicated by the conditions in the financial markets.At the time, this was a fair deal."

In 2005, Rivero vowed to double Gecina's profits within two to three years, which the companyachieved. Profits went from €649.9m in 2005 to €1.29bn in 2007. However, that figure fell dramatically last year, with Gecina reporting a lossof€875.4m last year -a fall of 167%. The company's entire portfolio lost 6% of value in 2008, down from €13.25bn to €12.43bn.

Gecina's investments

Despite this, Gecina invested. In February this year, it spent €107.8m on a 49%stake in Spanish property company Bami, which owns 12 office assets in Madrid. Five of those assets, totalling 86,500 m2, are rented, with tenants including Renault and BBVA. Five are projects, also totalling 86,500 m2, with two areas of land totalling 60,000 m2. At the end of last year, Bami had net debts of €448m.

But despite this, Gecina is confident that the deal will pay off, and it is pinning its hopes on the fact that Bami's portfolio is concentrated in the northern area of the Spanish capital and does not include residential properties. The area in question has so far drawn phone operator Telefonica and Spanish bank BBVA as relocators.

Calvo explains: "It's a new, up-and-coming area. There is substantial upside there and this gives us access to that.Bami is a good, well-managed vehicle."

As much as one tries to separate the many aspects of the Gecina story into more digestible chapters, there is always overlap. Rivero first took control of Bamiin 1997. This year's move by Gecina for Bami meant that Rivero relinquished his Bami board membership and post as chairman, and also cuthis stake down to 35% from 42%. Soler, meanwhile, sold his entire 42%stake in Bami, which is managed by several former Metrovacesa directors.

Gecina is understood to be close to selling around a third of the €700m of assets it is aiming to offload this year. The sale of around €250m of office and residential properties isin a "very advanced"stage, saysa source. Last year, Gecina sold €649m of properties.

Fortunately, the company has avoided buying large lot sizes, and with the first quarter of this year over, the Paris market is already seeing investment activity in the sub-€40m bracket."If buyers are looking for those kind of assets, then we certainly have something for them," saysCalvo.

Current loan-to-value ratios are 38.5%, with the option of going up to 55% within the next 12 months. Debt repayments due this year total €146m, but will rise in 2011(see graph, left).

The drive to sell off property this year should help the company in 2010, when €545m of bonds are due. Gecina is unlikely to buy this year. But, as Calvo says, it could be back in the gamein 2010, when financing is likely to be more widely available. Gecina will hold its annual shareholders' meeting on 20 May.