Investment Matters

Aveo update

This week an update was provided regarding the expected takeover offer for retirement village operator and developer, Aveo.  Brookfield (large Canadian alternative asset manager) is expected to make a formal offer under a Scheme of Arrangement, at a price of $2.15.  Final matters are being concluded between the parties before a firm offer is announced. 

Press reports indicate that securityholders may be able to accept the offer as cash, or to accept as script in a privatised company.

Background

Aveo is a retirement village operator, with 93 communities and 13,000 residents across Australia.

As at 31-Dec-18, its net tangible assets (NTA) per security was $3.83.

After market on 24-Aug last year, Aveo announced the commencement of a strategic review.  This review aimed to close the gap between the security price and the NTA/security.  Options including the sale of the whole entity were under consideration, which is exactly the path that is progressing with the likely Brookfield offer.

Investment history

The average acquisition price of Aveo for your portfolio was $2.00 per security (depending on your time as a client and other factors).

As it has been owned for a number of years, it has a complex trading history - with an initial acquisition as the FKP Property Group in Dec-13, a number of “top-up” purchases, and some trims in 2015, 2016 and 2017 (at prices from $2.60 to $3.30; average $2.91).  Additionally, it has paid a yearly distribution. 

Offer price vs NTA

The takeover offer price is a meaningful discount to NTA.  This is obviously not a preferred outcome for security holders (see our article last November).  Additionally, it is notable that Australian 10-year interest rates fell below 1% this week, yet Aveo’s asset valuation is based on a 13% discount rate assumption…

An abject failure

On 15-Aug-18 (Strategic Review announcement date), Aveo’s security price at market close was $2.37.  The strategic review process has been a failure – instead of closing the gap to NTA, the gap has widened.  It is hard not to be disappointed with the outcome.  It is also difficult to see how Aveo’s Board or an independent assessment could conclude that a $2.15 offer price is fair or reasonable.

The redeeming feature of the likely Brookfield offer is security holders don’t have to sell – they can elect to retain their ownership, albeit as private (non-listed) investors.

Another suitor?

There were a number of parties engaged with Aveo at the start of the strategic review process (~one year ago).  It is understood that Mulpha (the largest and dominant shareholder) is likely to accept the Brookfield offer as script.  Given this and the $2.15 price, it is possible that a higher bid from another party might now eventuate.

Conclusion

A takeover offer from Brookfield for Aveo at a price of $2.15 per security is likely to eventuate in the short term.  We view this a disappointing potential offer.  Your Investment Team will (obviously) keep you advised as further developments occur.

-          Fleur Graves