CommonWealth REIT launches offering despite raised buyout bid

Wed Feb 27, 2013 6:47pm EST

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(Reuters) - CommonWealth REIT CWH.N pushed ahead with its planned equity offering even as activist investor Keith Meister and real estate major Related Cos said they were prepared to increase their buyout offer for the office building operator.

Meister's Corvex and Related told the CommonWealth board that their new proposal of $2.26 billion, or $27 per share, was subject to CommonWealth cancelling its planned equity offering and engaging in talks with them in the next 48 hours.

The company, however, went ahead with the offering, ignoring the terms of the buyout offer and selling shares at $19 per share - a 20 percent discount to the stock's Wednesday's close.

CommonWealth sold 30 million shares, three million more than originally planned, raising $570 million from the offering, according to two underwriters. The offering saw very little retail participation, one of them said.

Shares of the company closed down 8 percent at $22.51 on the New York Stock Exchange, after rising 50 percent on Tuesday. They fell 5 percent in after-market trading on Wednesday.

The investors, who reported a combined 10 percent stake in the company on Tuesday and made an offer of $25 per share, said they had received expressions of interest for some of CommonWealth's properties in excess of their earlier valuations.

Earlier on Wednesday, the investors filed suit against CommonWealth in Maryland to prevent it from proceeding with the offering.

The shareholders have said the equity offering and planned debt repurchase is "value destroying."

The company did not return calls seeking comment.

Luxor Capital Group, a New York-based investment manager owning about 8 percent of CommonWealth, has also come out in support of Corvex and Related and demanded that CommonWealth form an independent committee to explore strategic alternatives.

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

CommonWealth's external adviser is REIT Management & Research LLC (RMR), which also owns interests in other publicly traded REITs.

"We seriously doubt that CommonWealth, a company externally managed by RMR, fee oriented and known for weak corporate governance, is interested in selling," Stifel Nicolaus analyst John Guinee said.

He said RMR will use every means possible to fight the shareholders' efforts as the proposed changes suggested by them may threaten other RMR franchises like Select Income REIT (SIR.N), Senior Housing Properties Trust (SNH.N) and Hospitality Properties Trust (HPT.N).

Shareholders point to several conflicts of interest at CommonWealth. They say the company's incentive scheme prompts it to make acquisitions regardless of the returns.

"There are conflicts everywhere but this (share offering) is by far the most egregious step they have taken," said a representative for a shareholder, who asked not to be named.

The shareholder had conveyed its concerns to the company in December regarding any potential share offering, this person said.

He said management had assured them at the time that they would not go in for an equity offering as their balance sheet were in good shape.

(Reporting by A. Ananthalakshmi in Bangalore; Editing by Saumyadeb Chakrabarty)

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