Stephen Peters: It is not clear who the F&C Property merger benefits

The recently announced merger of the F&C and UK Commercial Property Trusts (FCPT and UKCM respectively) has been taxing the mind of the investment trust sector of late. It is effectively (although not legally) a takeover of the F&C vehicle by UKCM, a NAV-for-NAV merger – meaning no significant immediate benefit for F&C shareholders.

The deal has put clients and asset managers in a difficult position. Many clients may own both, and so the decision as to how to vote in the ordinary resolution becomes complicated. If a simple majority of independent shareholders of either company vote against the deal, it will be called off. We understand the legalities of the deal do not force a minority shareholder vote but the firms advising the two parties were insistent on such a vote taking place. Not doing so would have been seriously detrimental to the reputation of many participants, and so their action should be applauded.

The arguments as to the merits of the merger are finely balanced on both sides. Independent FCPT shareholders that remain owners of the wider fund would enjoy a much lower total expense ratio, a higher dividend and higher dividend cover. They will become owners of a property portfolio that is arguably more benchmark-aware. Also the dividend will revert to being paid quarterly, not monthly as is now the case by FCPT. 

FCPT shareholders would be owners of a company with lower indebtedness and a weaker short-term performance track record. The combined entity is planning on increasing its ability to gear from 10% to 25% of total assets.

For UKCM independent shareholders the merits of the deal is less clear-cut. They will become owners of a larger company, able to compete in bigger and hopefully better property deals, and enjoy the returns from a good quality book of assets absorbed from FCPT. However, UKCM did perform well due to being ungeared during 2008, and its performance track record over a three-year period in both NAV and share price terms are much better than that of FCPT.

A case could be made by optimists that UKCM shareholders should benefit from the deal, and increasing debt levels, at an opportune time. This deal was made between the largest shareholders of both companies, Friends Provident and Phoenix Group. Their individual reasons for doing so are not known, but it is a shame that two of the better property companies in the sector have taken this step. A combined vehicle with a market cap of around £1.5 billion would be about 10 times the size of the next largest, ING Real Estate Income.

A better outcome would be activity in these smaller, subscale trusts, many of which lack clear, differentiating factors supporting their continued existence. The takeover of Rugby Estates Investment Trust by ING Real Estate is a start, but we would hope for more activity that was beneficial to the sector and shareholders in the future.

As it stands, the F&C/UKCM deal reduces choice for shareholders, takes away a cheap but cautious way of playing the UK commercial property market and removes a highly regarded manager in Richard Kirby from the sector. Neither company were particularly guilty of having eye-watering fees, poorly covered dividends or poor trading liquidity – problems which this deal would supposedly address. However, other names in the sector do.

In a property sector that did not cover itself in glory in the difficult years of 2007-09, it is hard not to be disappointed to see consolidation of two of the better names.

If the votes are successful – likely but not definite – the enlarged fund will give the sector a greater profile, but that would sadly only serve to highlight the sector minnows. We are not holding our breath that further activity will take place for the benefit of all shareholders.

Stephen Peters is head of investment trust research at Charles Stanley.