UPDATE 1-Investors ready to bid $2.1 bln or more for CommonWealth REIT

Tue Feb 26, 2013 4:31pm EST

* Investors demand CommonWealth cease equity offering

* Investors may seek removal of board if demands not met

* Stock jumps 54 percent

By A. Ananthalakshmi and Ritika Rai

Feb 26 (Reuters) - CommonWealth REIT shares surged more than 50 percent after activist investor Keith Meister and real estate major Related Cos said they were willing to buy the owner of office buildings for $2.1 billion or more.

Corvex Management, run by Carl Icahn associate Meister, and Related Fund Management, the investment arm of Related Cos, together reported a near 10 percent stake in CommonWealth earlier on Tuesday and called for the company to cancel its proposed share and debt offering.

"We believe that the company's real estate assets are significantly undervalued due to the misalignment of incentives between the company and its externally advised management structure, and track record of underperformance," the investors wrote in a letter to the CommonWealth board.

The shareholders said the stock has the potential to cross $50 per share over two years if CommonWealth made changes to its management structure and operating performance and followed a more shareholder-friendly capital allocation policy.

The stock closed up 54 percent at $24.41 on Tuesday, valuing the company at about $2 billion.

In a second letter to the board later in the day, Corvex and Related said they were willing to offer $25 per share for acquiring CommonWealth. Based on the 83.8 million shares outstanding as of Feb. 21, the offer values the company at $2.1 billion.

The offer can be increased "meaningfully" after completion of due diligence, the shareholders said, adding that they were willing to meet with the management immediately.

CommonWealth has not issued a statement responding to the shareholders' demands. It was not immediately available for comment.

The firms, which said they were prepared to seek a removal of CommonWealth's board if they did not receive an adequate response, reported a combined 9.75 percent stake in CommonWealth on Tuesday.

Corvex in recent months called for changes at ADT Corp , which appointed Meister to its board, and Ralcorp Holdings, which was sold to ConAgra for $5 billion.

Reported Cos was founded by billionaire developer Stephen Ross and is best known for developing the Time Warner Center. It is also the largest owner of luxury residential rental properties in New York.

MANAGEMENT STRUCTURE

The shareholders' main point of contention is CommonWealth's externally managed structure whereby its management is compensated based on the assets under management, and not the performance of the company.

This structure allows the company acquire assets regardless of their quality and the company has an incentive to issue as much stock as possible to fund the acquisitions, according to a Citi note on Monday.

A share offering would not affect the management as they own very little stock in the company - less than 1 percent.

"CommonWealth's track record of operational underperformance relative to the office REIT peer group stems from the company's externally advised and managed structure, which results in uneconomic decisions and puts shareholders and management on an uneven playing field," Citi analyst Michael Bilerman said.

CommonWealth's external adviser is REIT Management & Research LLC (RMR), which also manages investments for Hospitality Properties Trust, Senior Housing Properties Trust and other publicly traded REITs.

According to the investors' presentation slides filed with regulators, CommonWealth paid $209 million in management fees to RMR over the last three years, during which time the company's market value declined by $647 million.

Corvex and Related called the 27 million share offering and debt repurchase that CommonWealth announced on Monday "value destroying."

They said they would sue to stop or rescind the offering if the company does not cancel the plans by the end of the day.

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