Analyst fears giant property trust merger could hit F&C's revenue

KBC Peel Hunt have sounded a note of caution on proposals that could see the F&C Commercial Property trust merge with the Ignis-managed UK Commercial Property Trust.

KBC analyst Stuart Duncan warned that the plan could curb F&C’s future earnings.

‘While there remains a degree of uncertainty regarding the final impact on F&C, there is clearly a risk that F&C suffers some reduction in revenues,’ Duncan said.

Although a short-term compensation payment might mitigate part of the impact, Duncan said the deal introduced an additional 'note of caution’ regarding the £750 million F&C investment trust, which is trading on a projected price earnings ratio of 9.3x, well below the sector average for 2010.

If given the go ahead, the proposal put forward by Ignis on Friday would see F&C Commercial Property Trust’s property holding subsidiaries transferred to the UK Commercial Property Trust, while F&C shareholders will be given shares or cash in the Ignis-run trust after the handover.

Both companies have a significant shareholder that has irrevocably backed the deal, making it likely to forge ahead, specialists at KBC Peel Hunt said.

But Duncan cautioned: ‘Given the proposal has been received from Ignis, there is a risk that F&C could lose the management contract if it was reviewed by the board.  We think this trust would have contributed a reasonable level of management fees for F&C, given the £750 million of assets managed and a management fee of 0.6%. In addition, performance fees can be earned from this investment trust.  We think the fees earned are attributable to the REIT JV, reducing the impact to some extent on F&C’s earnings, this could clearly have an impact on expected revenues.’

F&C is currently trading with a yield of 8.8%. Its premium sits at 2.8%, below its average of 5.6%.