Morgan Stanley is set to unveil China’s sovereign wealth fund, the Chinese Investment Corporation, as the preferred bidder to Investa Property Group’s $2.5 billion portfolio of office assets at the end of the week but a tussle for the rights to manage the sprawling real estate empire could continue for months.
As DataRoom revealed earlier this month, CIC and its partner LaSalle Investment Management, is the favoured consortium to win the battle for Investa.
But the uncertainty surrounding the fate of Investa’s prized management rights, which control an $8.9bn property platform, has paved the way for a potentially messy conclusion to the deal and opened up the possibility of a break-up of one of the largest office landlords in Australia.
The problem centres on the pre-emptive management rights held by Investa’s listed vehicle, Investa Office Fund.
IOF represents the least value for the new owner — its unlisted stablemate ICPF holds a far larger and more valuable portfolio — but its departure would significantly dent the platform’s value.
The doubt over IOf’s intentions means Morgan Stanley will have to clinch a deal on its directly held assets and then pursue a longwinded negotiation for the management rights.
The US bank, advised by UBS, had hoped to avoid this scenario.
It offered IOF the chance to buy the platform at the start of the year for close to $130m. In exchange for the lowball price, the bank demanded the fund forgo its pre-emptive rights, and cautioned a higher bid could overturn the deal.
IOF’s board baulked and the negotiations collapsed.
Some in the market argue this was a serious error of judgment by the fund.
Morgan Stanley’s support for a higher offer would have threatened its reputation and the bank was keen to prevent the acrimony that has now set in between the two parties.
Meanwhile rival bidders Dexus and ADIA, a middle eastern sovereign wealth fund, remain in the frame. The pair submitted an offer for the entire business that was fractionally lower than the joint CIC and LaSalle proposal and according to sources Dexus was prepared to take over the platform without any resolution on IOF’s pre-emptive rights.
However it’s understood Morgan Stanley is keen to lock in the lucrative offer for the portfolio and then turn its attention to unravelling the thicket of conflicting interests on the platform.
This preference for certainty on the portfolio leaves CIC as the likely winner and an announcement confirming this status will be made on Friday, or Monday at the latest.
But LaSalle’s position remains precarious.
IOF’s board, advised by Fort Street and Macquarie, is now weighing an internalisation — a move that could take two months to conclude.
Mirvac too still hopes to snare the platform, worth close to $180m and is hoping its greater scale and knowledge of the market will see off LaSalle.
This article first appeared in The Australian Business Review.