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Capco mulls demerger but Liberum is sceptical

"After eight years as chairman, I leave the company in a strong position, with two of the best central London estates, a strong balance sheet and an experienced and professional management team," Durant said
Covent Garden
The Covent Garden estate in the heart of central London has been independently valued at more than £2.5bn

Capital & Counties Properties PLC (LON:CAPC) is considering hiving off its Covent Garden estates in London into a separate real estate investment trust (REIT).

The board expects should the demerger be pursued, it would be formalised by the end of the year.

READ: Capital & Counties looking to offload Olympia London with sale of Venues business

Were the Covent Garden side of the business to be demerged, it would leave the Earls Court assets as the centrepiece of Capco’s business.

The plan is for the Covent Garden company to be led by Ian Hawksworth, the current chief executive officer of Capco, while Gary Yardley would be at the helm of the Earls Court company.

“The board has taken into account the changing income profile and scale of the Covent Garden business together with the completion of the final phase of demolition at Earls Court, and believes that separation of the two estates into independent businesses would now generate a number of benefits,” the company’s statement said.

“Capco has achieved significant growth since listing, driving value creation from its two prime central London estates, both of which have positive long-term growth prospects. Underpinned by a strong balance sheet, Capco is well-positioned to support the current capital requirements of both of its prime assets. Against this backdrop, the board believes the time is right to consider the structure of the business in order to realise the potential of these unique assets and enhance shareholder value," Hawksworth said.

With changes apparently afoot, chairman Ian Durant has decided now would be a good time to step down from the role.

As is often the case in the City, his place will be taken by the senior independent director, Henry Staunton, who is currently chairman of WH Smith PLC and Phoenix Group Holdings Limited.

Liberum Capital Markets said it is not convinced the parts of Capco are worth more than the sum, adding that “confirmation of a demerger could be perceived as putting the business officially in play, or equally confirmation of a lack of trade interest in buying all or part of the estate”.

“CapCo’s decision to de-merge would highlight the risk premium which we believe is implicitly factored into the group's development land at Earls Court, but given recent media speculation, it could equally indicate a lack of third-party interest in acquiring the whole or parts of the site. If you generously applied Shaftesbury’s trading multiple to CapCo’s Covent Garden estate we believe it would imply the market is applying a 38% discount to its Earls Court land value,” the broker said.

Russ Mould, the investment director at wealth management firm AJ Bell, said the Earls Court assets “have long been the thorn in the company’s side compared to its more vibrant Covent Garden properties”.

“By creating separately-listed entities, the standalone Covent Garden business would be much more attractive to investors," Mould opined.

“The Earls Court component has been beset with political issues linked to a large redevelopment project and waning appetite for luxury London properties.

“This part of Capital & Counties has recently been the subject of takeover speculation and a deal could be easier to strike if a suitor didn’t have to factor in the prime Covent Garden assets in any conversation; However, you also have to question whether a takeover is plausible near-term for the Earls Court assets as demergers are often Plan B if a company has failed in its efforts to secure a trade sale (Plan A).

“Demergers can be interesting situations from a stock market perspective. Various studies have found that subsidiaries spun out of companies outperformed their former parent within their first year of trading. It remains to be seen whether such a trend will apply to Capital & Counties," Mould concluded.

Shares in Capco were up 1.2% in early deals.

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