|
Getting your Trinity Audio player ready...
|
Unlocking value – transaction structuring
For an unlocking value transaction to be structured properly, a good advisor with experience of unlocking value transactions, a good understanding of real estate and financial structuring is required. Such an advisor would have the requisite knowledge to structure a transaction ensuring translation of business needs into real estate needs is achieved; corporate occupier’s needs are met; and value and value potential is optimised for both sell-side and buy-side.
In addition, a good advisor would assist the corporate occupier in taking a strategic, as opposed to tactical, approach towards the transaction and options considered; defining transaction objectives and priorities; and in keeping an open mind about unlocking value options as opposed to settling for the ‘option de rigueur’.
With options such as setting up a REIT or asset-backed/traditional mortgage financing considered less than ideal, a traditional or structured sale and leaseback transaction would be the optimal options for consideration.
The (sale and leaseback) transaction structure would rely heavily on the occupational strategy designed and determined during the portfolio analysis stage. It should consider the effect of the transaction on corporate balance sheet and cash flow, the possibility of (crystallising) tax liabilities, the transaction accounting implication, portfolio risk transfer, the flexibility afforded the corporate occupiers and the inclusion of various long-term value-adding options for the corporate occupier.
In addition, the legal structure (of both the existing ownership and proposed new ownership) and its tax implication must be considered. The choice of structure must not hinder the ability (of the acquiring entity) to raise acquisition finance; and should be able to minimise or optimise any tax implication of the transaction.
Acquisition finance is key to transaction pricing determination. Whilst financing would typically be a mix of debt and equity, the loan to value ratio and type of financing would determine the flexibility and options the acquirer would be willing to offer. The financing options could therefore determine which entities are approached for the unlocking value transaction. For example, a corporate occupier with a need for ‘early exit’ flexibility and other options would perhaps not want an acquirer with a known penchant for high loan-to-value financing or securitisation financing.
Finally, consideration should be given to operational and commercial attractiveness of the transaction. A ‘well-structured’ transaction with little commercial viability achieves no objectives.
With the transaction properly structured and considerate of both sell-side and buy-side, focus now shifts to the process.
Transaction process
The options analysis; portfolio determination and analysis; and transaction structuring should have clearly set out the ideal and/or intended situation and objectives for the corporate occupier.
With these clearly set, a competitive process for the transaction can be run. A detailed Information Memorandum (with a transaction timetable) should be prepared to ensure most, if not all, bidders’ questions are answered in advance. This preparatory work should ensure comparable bids with minimal conditions are received at roughly the same time and non-compliant bids are rejected.
With bids in, a negotiation process is undertaken to ensure all bids are as competitive as possible. Following the negotiation and bid evaluation process, a preferred bidder is chosen and the transaction is executed with the preferred bidder on a very tight timetable.
Nigeria perspective
Unlocking value/sale and leaseback transactions are now being considered because there is a convergence of a number of key elements. These elements in the economy and the real estate sector are creating opportunities for large corporate occupiers/entities to unlock value/release capital from their real estate portfolios for investment into core business; achieve real operational and financial flexibility without punitive hidden and variable costs; provide cost certainty; participate in future value creation from the real estate portfolio; and align corporate and real estate portfolio to business needs and strategy.
This convergence is a function of
- Continued interest in real estate opportunities from local institutional investors such as pension funds and insurance companies;
- International institutional investors’ interest in Nigerian real estate;
- The need to diversify from investment products such as Nigerian government bonds;
- An inability of corporate occupiers to raise properly priced long-term real estate finance;
- An appreciation (by large corporate occupiers) of the extent of dormant capital locked away in their real estate portfolios;
- The need to optimise business financing and demonstrate value creation (especially with reference to key accounting ratios);
- Acceptance of the increasing need for operational and financial flexibility; and
- A shortage of sizeable, good quality real estate investment transactions in the market.
The benefits of unlocking value from corporate real estate portfolios now appear to have begun to permeate the boardrooms of various Nigerian corporate entities. With this knowledge, the need to optimise corporate entity balance sheets, and the need to release much needed capital into core businesses in the Nigerian corporate world, it seems unlocking value transactions would be explored and could be around for a while.
ADENEKAN ADENIRAN
