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Shareholders step up the pressure on Centro deal

Sydney Morning Herald

Tuesday March 29, 2011

Malcolm Maiden

A group of Centro Properties shareholders which collectively owns more than 11 per cent of the stock is preparing for legal action which may thwart the $US9.4 billion sale of the group's US shopping centres unless there is a shareholder vote.The action is aimed at forcing Centro to hand over information about the deal, and financing arrangements on the US properties. If successful, the shareholder group will consider whether it has grounds to press for a full shareholder meeting on the deal.The group has hired prominent lawyer John Atanaskovic to consider its legal options. Media relations identity Marty Dougherty is also involved, and letters between Atanoskovic's firm, Atanaskovic Hartnell, and Centro's lawyers, Freehills, are piling up.After an initial inconclusive meeting with Centro the shareholder group has also contacted the ASX and the Australian Securities and Investments Commission, asking why the huge property sale does not require security holder assent.Centro announced on March 1 that it would sell all of the Centro group's US assets to Blackstone for $US9.4 billion, and had entered into discussions with lenders to the group, its stablemate, Centro retail and with investors in various Centro property joint ventures aimed at amalgamating Centro's remaining shopping centre assets in Australia into a single company.The property group said at that time that a variety of stakeholder approvals and consents for the complicated restructure were required and that there was no guarantee the deals would go ahead. It said Centro security holder approval would "be required" - but is understood to have obtained initial agreement from the ASX that security holder approval is not required for the large US property sale that begins the process, only for the Australian amalgamation of Centro Properties and Centro retail, if it occurs.Listing rules that have the force of law state that the ASX can require a company to seek shareholder approval for deals that result in a "significant change ... in the nature or scale of its activities," and the $9 billion-plus US property sale appears on face value to qualify.Centro is believed to have told the exchange, however, that the relevant dollar value for the purposes of the listing rules is not the gross value of the deal, but the value that flows to Centro after debt that is tied to the US shopping centres is repaid about $600 million in the case of Centro Properties. The group is also believed to have argued that the financing of the US assets involved pledges that "ring-fenced" cash flow generated by the US properties.The restructuring centres on a debt-for-equity swap that would see Centro extinguish its existing debts, and Centro lenders emerge as the principal shareholders in a new, amalgamated company that combines ownership of Australian shopping centres divided between Centro Properties, Centro Retail and private investor syndicates.Centro and its lenders (hedge funds which have acquired the debt at discount to face value from the banks that originally advanced the money) have agreed that as part of the restructuring, $100 million will be made available for distribution to stakeholders who rank behind the core lenders.But the groups in line for some of that money include parties to the class action against Centro over the group's near-collapse and some Centro note holders. The sale is not expected to release significant amounts of money for distribution to shareholders. One aim of the legal push is to give shareholders additional leverage that could lead to a larger payout within the restructuring deal.The legal action is being led by Smartec Capital, a private company associated with Margaret Lou. Smartec is a relatively small Centro shareholder, with a stake of about a half a per cent, but is part of the self-styled Centro Shareholders Association, a group of investors who turned up on Centro's share register early in 2009, and own more than 11 per cent of the company's securities.The shareholder group has been attempting to gain leverage for its stake from early 2009, and has unsuccessfully sought Centro board seats and proposed alternative financing structures, and is pressuring Centro now as ASIC's civil action against Centro directors for misleading the market about Centro's financial position looms (the case is scheduled to begin on April 4).In letters seen by the Herald, Smartec has argued that Centro has a future if the US properties are not sold - an argument strongly rejected by Centro's law firm, Freehills.It was clear by that time Smartec and its affiliated investors bought in that the Centro group was in trouble, and that the financial pressure was greatest in the company they bought into, Centro Properties.Centro Properties had disclosed "a significant uncertainty " about the group's ability to continue as a going concern by early 2008, and has been reporting negative net equity from its December 31 accounts: the most recent estimate, at December 31 last year, was that there was an equity shortfall of about $1.6 billion.A debt stabilisation agreement announced by Centro in December 2008 set out plans to issue convertible securities to debt holders that if converted would deliver them control of 90.1 per cent of the company's expanded capital, and dilute existing security holders to a combined stake of less than 20 per cent.But the fact that the investors made a bad investment when it bought into a clearly distressed Centro is unlikely to be a factor in any legal challenge asserting that shareholders have the right to vote on the deal.That would revolve around whether or not Centro's was correct in its advice to the ASX that the US leg of the deal does not require shareholder approval.

© 2011 Sydney Morning Herald

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