25 August 2010
KIFIN LIMITED - STATEMENT TO SHAREHOLDERS OF MINERVA PLC
("Minerva" or the "Company")
Dear Fellow Shareholders
We appreciate that you probably, and justifiably, feel that by now you have received too many statements from both ourselves and the Board of Minerva.
As we have previously stated, we had hoped to be able to resolve the current situation at Minerva in a more dignified and private manner, a sentiment shared by Minerva's major institutional shareholders with us in private meetings held during May and June of this year and in subsequent communications. However, the decision to turn this into a public debate was made by the Board of Minerva when it made a public announcement on 14 July 2010. This announcement grossly misrepresented the focus of our private meeting held on 7 July with Oliver Whitehead and the Company's advisors and we were left with little choice but to respond in a similar manner by requesting a General Meeting at which all shareholders can cast their vote, after being appraised of the issues.
The only purpose of the 7 July meeting was to discuss the concerns highlighted in our Request for a General Meeting announced on 22 July, i.e. the Company's lack of financial disclosure and transparency; the management of the assets; and the lack of a sustainable strategy for the business. It was only when it became clear at the meeting that the Company was not going to provide answers to our rudimentary questions that the conversation turned to the proposed change of the chairman and chief executive.
Shareholders should also be aware that we had previously met twice in April with the Company and communicated later that month in writing on these and other issues without making any progress whatsoever.
Our continued concerns are exacerbated by the fact that we have not been given the opportunity to meet and work with the Company's independent non-executive directors despite our recent specific request to do so which was declined on 24 August 2010. We are confident that, if we had been given that chance, we would have found an elegant and mutually acceptable solution and avoided this public spat.
Most importantly, we are aligned with ALL shareholders, regardless of the size of their investment, to ensure the right practices and management are in place to unlock the undoubted potential of Minerva and its assets. Minerva has continued to mislead you by focusing your attention on our initiative being about gaining control. This rhetoric is a complete red herring. Our only motive for the proposed changes is to ensure the future success and viability of the Company.
We hope that this will be the last time we have to write to you on this subject and we would therefore be grateful if you would take the time to carefully read and digest the following points. This is a more detailed update and also answers some of the specific allegations made against us by Minerva earlier this week, including that we provided "factual inaccuracies" in our statement of 23 August 2010. As you will read, we include new explanations and draw your attention to information regarding meetings between ourselves and Salmaan Hasan in early 2009.
These are set out below under the following section headings:
· Corporate Governance, Lack of Transparency and Inadequate Disclosure of Key Financial Information
· Board performance and composition
· Engagement with shareholders
· Wigmore Street
· Rejection of the Limitless offer
· Future strategic options.
We have unequivocally stated that we are not seeking control of Minerva. We are simply proposing changes to a Board which has continually failed to provide full disclosure and transparency, or a clearly defined strategy for the long term future viability of the Company.
Our proposals demonstrate that we would not have control of the Board or the Company. Instead we would have:
- two non-executive seats out of a total Board of eight directors, representing 25% of the votes;
- two out of five non-executive directorships; and
- a shareholding of under 30%. We have already stated that we are long term investors and that we will not make a further bid.
In addition, we would accept, subject to shareholder approval, that:
- one of the existing non-executive directors could take on the role of independent non-executive chairman and would not be a Kirsh appointee; or
- alternatively, if the Board felt it appropriate, one of the existing non-executive directors could perform the role of executive chairman or temporary CEO, instead of Philip Lewis as currently proposed, while a suitably qualified individual with the appropriate direct property experience to secure Minerva's long term future was found; and/or
- the new permanent CEO would be selected by a newly constituted Board Committee which, if the Board felt it appropriate, would not include Philip Lewis.
We reiterate, if the non-executive directors had engaged with us on these important issues, then a solution could easily have been found.
In addition, Minerva has been economical with the truth about KiFin's attempts to "seek control without paying a premium". We would like to state again that the only reason we made an offer for at least 50% of the entire share capital in November 2009 was because we were not able to secure dispensation from the Takeover Panel for a partial bid to increase our investment in the Company, taking us up to (but not exceeding) 50%.
Minerva has also repeatedly asserted that our bid of 50 pence per share "significantly undervalued the Company", and described this as a "derisory level". The facts are that our offer was made in November 2009 at a premium to all accepted financial metrics, with our offer price of 50 pence representing:
- a 30.7% premium to the previous day's closing price of 38.25 pence;
- a premium of approximately 52% to the average share price of 32.90 pence for the previous three months to 16 November 2009; and
- a premium of 6.2 per cent. to the recently announced diluted EPRA net asset value per share of 47.1 pence (see Minerva's annual report and accounts for the year ended at 30 June 2009 as announced on 5 October 2009).
In other words, at the time, 50 pence was a full and fair offer based on the prevailing financial information provided by Minerva's Board of Directors to all shareholders and was at a price which reflected the continued uncertainty surrounding the Company's future and its levels of debt.
On 2 December 2009, just eight weeks after its results announcement in October and following our offer, Minerva discovered that it had an EPRA NAV of 95 pence. There had been no reference in its previous results to the fact that there could be such a significant rise in EPRA NAV in the short term as a result of the effect of the Company's huge leverage. At that point we declined to increase our offer.
We point out that we never carried out any due diligence on the Company other than relying solely on the information which was in the public domain at the time.
We acknowledge that we were, of course, aware of the high level of the Company's indebtedness at the time of our offer. We were not aware then (nor were other shareholders) that the directors had completely altered the risk profile of the business when they surrendered the previous policy of ring-fenced non-recourse debt, in return for the "additional security" pledged to its lending banks.
corporate governance, Lack of Transparency and inAdequate Disclosure of Key Financial Information
We are pleased that the Board has finally begun to disclose important details of the additional security that was given away in September 2009 to the banks in order to re-finance existing loans, the exact details of which are still not fully disclosed;
It is regrettable - to say the least - that it took the threat of a General Meeting for shareholders to obtain this new limited information. We, together with other institutional shareholders and independent commentators, still do not consider that sufficient information has yet been disclosed to enable shareholders to ascertain the true impact of these changes. The price sensitive nature of the information (which was only provided under duress) was highlighted by the way in which the share price of Northacre plc, the Company's joint venture partner at The Lancasters, reacted on the news, rising 43% on the day of the announcement and now stands almost 300% higher than the price immediately prior to that announcement.
The outstanding issues include:
- Exactly what collateral has been given to the banks?
- To what extent is interest on the Company's development loans being capitalised?
- When is the interest payable and how much will it cost?
- Whilst we understand the commercial sensitivities surrounding the announcing of the detailed leasing targets agreed with the banks regarding Walbrook, we are concerned that they are too onerous in the current market and believe shareholders need comfort that they are not having a negative effect on the Company's ability to secure a letting.
- What happens if Walbrook and the remainder of St Botolphs are not let in accordance with the lending banks' timetable?
At least we can now see that potentially half of the dividends due from The Lancasters has been pledged. If we read this correctly, the maximum liability is £37 million. It would also appear that a second charge has been given over the Company's equity value at Westerhill Road, Scotland. This is apparently capped, but we still do not know the value of the equity that remains. The Board announced that it is enforceable if the proceeds of all other security over St Botolphs are insufficient to satisfy existing liabilities - but what are these and when will they trigger?
The Company maintains that its level of disclosure is beyond that of its "peer group". We believe a reduced level of disclosure can be acceptable when a reporting company has cash-flow from a portfolio of income producing properties as well as a clear and viable strategy. It is also worth pointing out that - whilst Minerva claims to have "peers" - there is no other publicly quoted property company with nearly £1 billion of debt, no free cash flow and just seven key assets, six of which are developments which have not yet realised any profits or generated any free cashflow and based on the disclosed EPRA NAV is geared to the tune of six times the anticipated value.
Contrary to Minerva's statement on Monday, our reference to "inadequate financial reporting" was simply about the lack of transparency and disclosure which is at the root of all our concerns. We are not questioning the calibre of the Company's valuers and auditors.
Board performance and composition
We support the appointment of two non-executive directors earlier this year which made the Board compliant with best practice standards of corporate governance, although we would have appreciated the chance to meet with them. It is notable, however, that this improvement in the Board composition followed our bid for the Company, at which time the Board was non-compliant, comprising only the Chairman, one non-executive director and three executive directors.
Despite the Board's assertions that it now complies with recommended corporate governance best practice, this is the Board that refused to provide price sensitive information on its additional security to shareholders until we requisitioned the General Meeting - and which continues to advise its shareholders to vote against adequate disclosure.
Engagement with shareholders
We do not understand how the non-executive directors of Minerva, other than Oliver Whitehead, can unanimously support management when they did not consult with the Company's major shareholders. It is the fiduciary duty of non-executive directors to represent ALL shareholders' interests, not to protect management. We firmly maintain that a meeting should have taken place between the independent directors and the Company's largest shareholder to hear our views, before they recommended that shareholders should vote against all resolutions, rather than relying on the chairman's and chief executive's interpretation of events. In addition, you should be aware - as stated above - that on 24 August 2010, the non-executive directors declined a specific request from us to meet.
In Minerva's letter dated 11 August to shareholders regarding the General Meeting, they say that, "since July 2009", they have met with "current and prospective shareholders on more than 60 separate occasions and have given nine group presentations and site tours". Despite our 29.5% shareholding, we have never been invited to any of these group presentations, nor have we ever been offered a meeting following the Company's results.
We would stress again the recommendations of The Financial Reporting Council's recently published Stewardship Code for institutional investors, which we included in our announcement on 23 August 2010.In direct contrast to the situation at Minerva, we have established an enviable 30 year track record of engaging with and supporting the management of the other companies in which we have invested and with whom we have entered into joint ventures worldwide. A clear example of this is Abacus, an Australian REIT, in which we own a 33.2% stake. We have sought no board representation because of our close working relationship with the Abacus board and executive team, typified by a Joint Venture agreement announced to the Australian Stock Exchange on 23 July 2010 to jointly acquire a shopping centre and marina, for a total consideration of AUS$174 million. Our support for Abacus is widely viewed as a substantial benefit for all its shareholders.
We would like to remind you that, combined, the current directors of Minerva own less than one million ordinary shares representing less than 1% of the Company's issued share capital.
Unlike the management team, we are uniquely aligned to the best interests of all shareholders as a result of our 29.5% shareholding, and have remained a committed shareholder and have never sold a share, despite the events since last November.
We were interested, however, to observe that on 3 March 2009 the Chairman sold 220,000 shares at a price of 10 pence. He subsequently purchased 314,573 shares on 31 March at a price of 6.99 pence. Since that time, no other director has underlined his support for the Company or aligned himself financially with other shareholders by acquiring shares.
However, the three executive directors have been awarded options at an exercise price of 27 pence, providing them with a risk-free upside in a highly leveraged Company where they are rewarded by growth in net assets which moves dramatically on tiny changes to the gross values, rather than any metric which provides a sustainable future for the Company.
Contrary to Minerva's assertion, the only reason why we did not reach a formal agreement to acquire this asset was because we were not given the chance to do so, despite reaching a verbal agreement with Salmaan Hasan that we would better any offer received.
The Company asserts that the Wigmore Street property was sold at a 20% premium to book value. This is true when the sale price of £40.7 million is compared to the 30 June 2009 valuation but this represents a 33% discount to the 30 June 2007 valuation of £61 million and a 25% discount to the £54.5 million 30 June 2008 valuation. More importantly, it represents almost a 20% discount to the £51 million asking price set out in the marketing documentation at the time of the sale.
Fellow shareholders should also note that, following the sale, we subsequently made an offer to the buyer, Standard Life, but they were not prepared to sell.
Rejection of the Limitless offer
On 23 August 2010 Minerva issued a statement which said that: "KiFin's statement that the Board "rejected the Limitless bid" is incorrect. This is a matter of public record; the Board had agreed that it would recommend Limitless' 160p offer. Shortly after the collapse of Lehman Brothers, and at a time when the global financial system was highly stressed, Limitless announced that it had chosen to withdraw its proposed offer because it had been "unable to obtain the necessary consents" from third parties."
We would like to clarify that we made our statement about the failure of the Limitless bid based on information we received directly from Salmaan Hasan at a series of private meetings held at our office in London and at Minerva's offices on 19 January 2009, 27 January 2009, 11 February 2009, 27 February 2009 and 3 March 2009.
We believe it is Salmaan Hasan's responsibility, not ours, to disclose the detail of those meetings to his Board and other shareholders.
FUTURE STRATEGIC OPTIONS
It is our view that the Company has not provided shareholders with sufficient detail about its strategy to unlock and protect its inherent value.
Specifically, we would wish to address the financial security of the business and the current management of the assets which are our two key areas of concern. This is the situation we find ourselves in after five years under the stewardship of the current chairman and CEO.
Minerva's Financial Security
· One only has to glance at the Company's balance sheet to see that it is in a "perilous state". It has mounting debts, a portfolio of development sites and/or assets generating no meaningful rental income and little equity value (as the ring-fenced principle has been broken) that is not already charged to the Company's lenders.
· With regard to the "hype" about the Company's profits, it is clear that the Company has no free cash flow. Any reference to profit or loss is only as a result of a rise or fall in asset values and does not provide much needed cash to support Minerva's long term future.
· As professional property investors and owners, we do understand that leasing markets are tough. However, our top priority would be to ensure that the Company secures a letting at Walbrook and further lettings at St Botolphs. Should the leasing obligations provided to Minerva's banks be proving too onerous in current markets, it is the Board's duty to negotiate new terms.
· We also recognise that, even if St Botolphs and the Walbrook were fully let tomorrow, it would be highly unlikely that this would result in any rental income for over two years, given that it generally takes around a year for an occupier of this size to move in, and that markets currently allow for about a two year rent free period. This means that the Company would still need an injection of capital just to enable it to survive until then - let alone providing sufficient financial resources to progress its other developments.
· In light of this, although Minerva has claimed the lack of a rights issue as proof of its management success, a rights issue without the support of its largest shareholder, representing 29.5% of the issued share capital, would never have succeeded. Clearly, with our support and involvement, this would become a realistic option and shareholders would thereby have the option of injecting fresh equity into the Company. This model has worked successfully for many other UK property companies.
· The business does not have any firepower for new transactions, yet administrative expenses for the year to 30 June 2009 were almost £7 million. Salmaan Hasan's salary is £440,000 per annum - 14% of the entire wage bill - compared to Derwent London, Hammerson and British Land, where the chief executive's salaries represent 5.9%, 2.6% and 2.5% of the total wages respectively. We believe that the Company requires an immediate cost-cutting and efficiency programme.
Expert management of Minerva's assets
Despite the claims of Minerva's Board, we do not believe Minerva's current management acting on its own, has sufficient experience or skills nor does the Company have the financial capability to carry out the projects below:
· Odeon Kensington
This is a flagship project for high end West London residential development, which was identified as a core area of focus for the Company in an interview with Salmaan Hasan in a key industry publication in February 2010. Since then, the Company has continued to try to sell this asset through joint agents Savills and Montague Evans, seeking £70 million. It has not been possible to start this development because the Company does not have a suitable site to satisfy the affordable housing requirement. KiFin has established that the landowner of the adjoining site made a proposal for the Odeon which was rejected. We also understand that Minerva now intends to object to their planning application. There is excellent synergy between the two properties and detailed and constructive discussions should take place. Working in partnership with adjoining landowners is widely acknowledged as a good commercial strategy, especially if supported by the local planning authority.
As Minerva's largest shareholder, KiFin has met with the CEO of the London Borough of Croydon and, subsequently, its Director of Regeneration. Planning consent has expired and the previous development agreement is now void. It is our understanding that The London Borough of Croydon no longer sees Minerva as its development partner, which we believe has impacted the value of the landholding. We also understand that Croydon is seeking to appoint new consultants to prepare a fresh development brief and select another developer to eventually acquire the "Park Place" land. That leaves the Allders Department Store which will ultimately form part of a complicated extension to the established Whitgift Centre which is controlled by one of the Irish Banks. The complex nature of these negotiations means that - in our belief - it will be at least three to five years before any value is realised or recovery secured and then only if an expert team with a proven track record of town centre development and the appropriate financial backing is in place.
· Wandsworth, Ram Brewery
Naturally we were all disappointed that the planning consent was not granted at Wandsworth. As a result, we have taken independent advice on the current situation. We have learned that, despite the approval of the London Borough of Wandsworth and the support of the Mayor of London, the development did not have the approval of CABE, English Heritage or the Health & Safety Executive. This is a serious failing in terms of tactics and policy. In our view, there must now be doubt that there is any significant equity value left in the project and certainly no development profits will be realised for at least three years. We have had discussions with residential developers who believe that the land is now worth less than the original purchase price. Again, this project requires an expert team with a proven track record and the appropriate financial backing to proceed.
The Company does, however, have two first class assets in the City of London - St Botolphs and Walbrook, both which were acquired and conceived under the previous management.
St Botolphs is 50% let - but probably is not income producing to date.
Walbrook is still 100% vacant. It is a matter of fact that three potential tenants, Bloomberg, Nomura and Blackrock, have all sought to take space at alternative buildings in the City of London and that Minerva "missed" the chance to secure these lettings at Walbrook.
To underline this, we accepted an invitation to meet with Bloomberg in New York who confirmed that they had actively considered the Walbrook site but that Minerva over-negotiated and Bloomberg therefore withdrew its interest. Bloomberg is now rumoured to be close to agreeing terms on an adjoining development. When the building is ready for occupation and if a letting is not secured in the next few months, rates and service charges will become payable, which we estimate will cost the Company circa £10 million per annum.
As stated above, we do not expect Walbrook to be income producing until early 2013 - but we do not have sufficient information on how interest is capitalised on the development finance which totals £275 million or how much equity value will remain, a further example of their lack of disclosure. In the meantime, we know that there are serious covenant tests due in Minerva's next financial year beginning July 2011.
Finally, we remind you that our efforts are in the best interests of all Minerva's shareholders as we seek a new management team with the skills to realise the potential of the Company's assets. As a 29.5% shareholder, committed to its long-term investment in Minerva, we will only ever enjoy our pro rata share of the upside and are therefore perfectly aligned with all other shareholders.
We believe that the Company, under new management, will be run more effectively and urge you to consider the General Meeting resolutions carefully. Shareholders should be aware that independent, influential commentators have produced recent reports that are highly critical of the Company's performance and strategy.
The future viability of Minerva is far safer in the hands of a Board which has the full support and backing of its major shareholder, rather than in the hands of its existing management.
YOUR VOTE IN SUPPORT OF THE RESOLUTIONS IS A VOTE TO IMPROVE THE MANAGEMENT OF MINERVA AND ENGAGEMENT WITH ALL SHAREHOLDERS AND TO ENSURE GOOD CORPORATE GOVERNANCE
We Therefore urge Minerva shareholders to vote for positive change
by supporting the EGM resolutions
For further information:
Financial Dynamics: +44 (0)20 7831 3113
Stephanie Highett/Richard Sunderland