The Finance Ghost: The battle for MAS is over – now begins the war?

Daily Maverick

6 days ago

With Hyprop terminating its bid for MAS Real Estate, Prime Kapital has won the first skirmish. But the war is in its early stages…
MAS Real Estate is the company that nobody expected to become the juiciest M&A story on the JSE this year.
All the ingredients are here – big hitters on either side of the table and a board in the middle that is coming under increasing pressure by the day. And depending on the outcome of the extraordinary general meeting that has been scheduled for Wednesday, 27 August, at the request of a group of South African institutional investors, we could see an equally big hitter like Des de Beer landing up on the board as well.
But why all this interest and opportunistic dealmaking activity? Why are such impressive sharks circling this particular boat?
Blood in the water
Although MAS isn't exactly a household name, it does have a market cap of R15.6-billion. Despite this significant size, MAS has been struggling to prepare for upcoming bond maturities, flagging weak support in the bond market for companies with MAS' risk profile. This led to the suspension of the MAS dividend in 2023 and subsequent panic selling by dividend-focused investors.
Then, as various other strategies to strengthen the balance sheet came to fruition, investors with more of a net asset value (NAV) or total return focus (vs purely caring about the dividend yield) bought shares, leading to a recovery in the share price to levels seen before the panic selling.
But here's the really important bit: the current share price still represents a substantial discount to NAV, which means that there's money to be made by getting control of the assets and managing the balance sheet in such a way that value can be unlocked over time. A lot of money.
And in reality, the progress made by MAS towards being ready for bond refinancing or redemption activity is probably the major catalyst for the recent flurry of interest, as the best time to acquire control of a business is when it is still a recovery story rather than a bright and shiny object that everyone loves (and hence wants to be paid a fortune to part with).
Either way, the substantial gap between the 52-week high of R24.65 and 52-week low of R15.76 tells quite a story, with plenty of opportunities for traders along the way. But aside from the short-term gains (and losses) on offer, the real story here is the battle between Prime Kapital and Hyprop, with both parties keen to get their hands on the MAS value unlock opportunity.
Disclosure, dividends and liquidity – these are the tools of war
In the world of corporate finance, parties bring different negotiating tactics to the table. At Prime Kapital for example, one of their key strengths in this fight is that they hold the keys to unlocking the capital that is currently tied up in the joint venture between MAS and Prime Kapital. With so much focus on the balance sheet at MAS and a desire to get back to paying dividends, that capital is a highly valuable bargaining chip.
This joint venture has been a major bone of contention for institutional investors, with allegations that the board of MAS didn't disclose important elements of the joint venture agreement to the market. Simply put, investors have been caught by surprise that Prime Kapital holds quite so much influence over the broader MAS balance sheet and cashflow profile. This has led to the demand by investors for changes to the board, which would include the removal of a couple of directors and the appointment of several new independent directors.
The 'white knight' for these investors is Hyprop, a JSE-listed Reit (real estate investment trust) that is well known to the local institutional investor community. Such is the support that Hyprop enjoys that it had no difficulties in raising more than R800-million in an accelerated bookbuild process, based on little more than a vague suggestion that it would have a go at acquiring MAS if it raised the money. But of course, R800-million is nowhere near enough to acquire control in a fund with a market cap of R15.6-billion, which brings us to the next negotiating point: liquidity of the shares.
For Prime Kapital to acquire control of MAS, it needs to convince shareholders to accept a part-cash, part-shares deal. Although it is currently suggesting that it would put more cash on the table than Hyprop (which is a positive), the downside to its indicative offer is that the equity portion would take the form of an inward-listed preference share that is unlikely to have much liquidity at all.
The actual terms of the preference shares do have some appealing features, but they will almost certainly require investors to take a long-term view of holding them until some kind of redemption event.
In contrast, Hyprop shares are liquid and investors who swap their MAS exposure for shares in Hyprop would have no trouble in reducing that stake if required. The Hyprop offer is thus perceived as having a stronger equity portion, while the Prime Kapital indicative terms are stronger on the cash side.
Understanding these levers is important, as it shows how we got to a place where Hyprop put in a bid that was terminated almost as quickly as it arrived.
A highly unusual offer structure
Offers to shareholders are usually open for a long time, as there's a process in which the board of the target company is given a chance to hire an independent expert and give the market a proper view on the transaction. Such offers are also usually open for acceptance even once important conditions have been met, allowing shareholders to accept an offer that they know is going ahead. And in most cases, those conditions are outside of the control of the offeror, i.e. they relate to regulatory approvals.
The Hyprop offer followed none of these market norms. Before Hyprop decided to terminate the bid, the structure of the offer was that it would have been open for acceptance for only a few days from when it was announced. This doesn't give the board time to properly opine on the terms, nor does it give enough time for any of the important underlying conditions to be fulfilled. In other words, investors would have to accept the offer (via an irrevocable undertaking) and then wait and see how long it would take for conditions to be met.
But there's more: one of the conditions was a demand by Hyprop to be given the same access to information as Prime Kapital, which of course ties in beautifully with the institutional investors and their valid concerns around disclosure shortcomings.
Now, had there been no attempt to address those shortcomings, this would be fair. But the nuance here is that the MAS board had already released a detailed legal summary of the terms, so this demand by Hyprop implied that there were still significant disclosure issues.
If true, that casts the MAS board in a very poor light. And if false, then it creates inappropriate optionality in the offer that prejudices shareholders who must give an irrevocable undertaking in the hope that Hyprop eventually chooses to go ahead with closing the offer, something that could take several months.
As the demand by Hyprop wasn't going to be met by Prime Kapital (as this would've required detailed disclosure of documents by a party that is in no mood to cooperate with Hyprop's bid terms), Hyprop decided to walk away from this offer.
Much as it may lay the blame at the door of poor disclosure, I still can't see how they could justify such an aggressive offer structure. Why was it necessary for the acceptance period to be just one week, particularly when the price implied by the offer was at a substantial discount to the current traded price of MAS?
What's next?
With Hyprop terminating its bid, Prime Kapital has won the first skirmish. But the war is in its early stages, as we are still talking about a substantial property fund that is trading at a juicy discount.
Will Hyprop stay in this fight? Will another party enter the fray? There's no way of knowing. All we know is that Prime Kapital certainly isn't going anywhere, as it is a significant minority shareholder in MAS and holds great influence over its economics. We also know that the institutions won't just roll over, as they are pushing for changes to the board and answers about disclosure.
It feels unlikely that this will just fizzle out. All eyes will now be on the extraordinary general meeting in August, followed by the responses of the (potentially new) board to the institutional investor questions.
If nothing else, perhaps the lesson to learn here is that if you are going to attempt an offer with highly unusual terms, you are setting yourself up for an unpleasant outcome. Had Hyprop simply dialled back some of the terms to more reasonable levels, it wouldn't have given Prime Kapital so much ammunition to discredit its bid. DM