Companies value land according to their own needs, not the market.
 

Which will be the first SA listed company to be targeted for takeover and stripping out its property assets? Leading candidates are Sappi, Tongaat-Hulett, Nampak, AECI and Sun International, but there are several other property-rich corporates that are vulnerable.

One thing is certain: more than one private equity predator is stalking the JSE for prey. They are looking for companies:

• 
  That have not been keeping their property valuations up to date, as commercial property prices rocket;
• Whose property assets are not reflected in their share price; or
• Who are unaware that properties could be redeveloped at a big profit.

Once the predators take the companies private, they can turn a tidy profit by redeveloping and selling the properties at their true value, or by taking the properties out of the companies and relisting them.

The CEO of one Cape-based private-equity property investor has given the FM sight of his analysis of the top 80 JSE firms with property balance sheet values at mid-2006, on condition he remains anonymous.

"Property prices have risen sharply since then and are continuing to rise," he says. "Many companies have the properties in their balance sheets at book value unrelated to market value. We're watching like hawks for the arbitrage opportunities." But he won't say when and on what he is likely to pounce.

Most listed property owners own properties because they use them. They have little interest in wider property opportunities that can be taken. Some properties are past their usefulness but remain on the books.

Internal property valuations usually reflect the value to the companies, and not their market value. In any case, balance sheet values are often out of date.

But it's the development potential rather than the gap between the book and market value that gives private equity predators their biggest opportunities.

London & Regional, the UK-listed property giant and controlling owner of the V&A Waterfront, is believed to have been after Peermont's properties when it made a bid for the casino owner recently, but backed off when the price rose too high. Sun International could be next in its sights. The hotel, resort and casino owner valued its property portfolio at R4,3bn in mid-2006, against a market capitalisation of R10bn. Its market cap is now R16bn.

Sun International's property book value has little relation to market value. "Our values are based on the income we derive from the properties," says Sun International's Richard Hawkins. But a property valuer would seek the highest and best use of the property.

For instance, GrandWest casino in Cape Town and Carnival City in Gauteng are in prime urban areas and could be redeveloped into mixed-use projects, greatly increasing value. These would be ideal opportunities for private equity bidders.

Tongaat, the sugar giant that owns thousands of hectares of farmland in the greater Durban coastal region, could be another target. Its subsidiary, Moreland, has been rezoning and developing hundreds of hectares over 15 years, and in 2005 was its most profitable operation. One Moreland manager tells the FM the group is aware of its exposure and is exploring defensive strategies.

Three years ago group CEO Peter Staude conceded that Tongaat's 13 000 ha of mainly farmland was undervalued, listed in its 2002 balance sheet at R250m. By mid-2006 it was valued at R607m - still far below what property developers think it is worth.

But today Staude says the company will not be a pushover and there is no big opportunity to turn the property around quickly. "Whoever owns Tongaat will have large mills that must be kept busy processing sugar, so you can't sell off a whole lot of land without replacing it," he says. "Moreland rezones and develops commercial land each year to meet demand, usually between 100 ha and 400 ha. We can replace that land by buying new farmland at the same rate.

"Besides, if you compare our share price and price:earnings ratio with Illovo Sugar's, you will see that our development of property is reflected in the share price."

But the FM's source says the only reason Tongaat is not a target is that the sugar price is so high, making it uneconomical to take it over. "But we believe astute and aggressive property developers could achieve more than Moreland, and Tongaat could become a target the next time the sugar price falls."

Nampak may also be vulnerable, but, says the Cape investor, "it has non property problems to sort out and we would avoid it until we could buy and possibly sell on a clean business".

Paper manufacturer Sappi had R25bn in property, plant and machinery, of which about R4bn was the depreciated value of its vast property holdings. Most of the property is rural forestry, but even this could have development potential.

Sappi has brought in a black economic empowerment partner to help find development potential for this land, but that is unlikely to deter a predator.

One would have thought corporate SA would remember the lessons of the 1960s - which the 2000s mirror - when asset strippers led by British company Slater Walker started taking over JSE-listed corporations.

Local strippers took over Port Elizabeth shoe manufacturer Bagshaw Gibaud in the late 1960s, closed the factory with the loss of thousands of jobs, sold the property, took the cash and reopened for business as BG Securities. It could happen again.