Enter Entra
Merger play with downside protection and +25% upside
The Entra saga is now more than one year old. Apart from a brief and small entry and exit a couple of months ago, I have stayed a mere observer. Until now.
Predicting these events has been very hard from the start, as the sequence fit no common set pattern from other merger stories. It started last November with SBB first engaging with Entra’s board and then going rogue and launching an unsolicited bid for the company. Castellum, who seemed to stay in good graces with the board, launched a higher offer shortly afterwards. SBB countered even higher and Castellum ultimately bested that offer too, but with a more share-based compensation than SBB.
The board didn’t end up recommending either bid and both foundered. Which was no surprise as Castellum had bought 10%, effectively blocking SBB’s bid. SBB ended up themselves taking a corner after the bids had fallen through.
Additionally, early in this process, Balder also purchased a corner over the market, making it three Swedish giants vying for this formerly state-controlled Norwegian company. Balder’s CEO Erik Selin never made any indication of wanting to bid for the company or sell his shares at a higher price, instead — while continuously gobbling up shares — professing his wish for Entra to stay public. A line he still keeps to.
With Arnhult taking over the reigns at Castellum in the spring of this year, there was some anticipation of Castellum folding. Arnhult’s main focus was on consolidating his own sphere. In the three-way deadlocked situation during the winter he had also, as an outside observer, expressed some reticence about the possibility for rational outcome. What instead happened was that SBB gave up and sold their 10% stake — booking a nice quick profit — to Castellum at 210. Castellum went on to acquire another 10% of the shares, putting them roughly on par with Balder in size at just above 30%.
At this point it was pretty widely expected that Castellum and Balder would find some way of coordinating to take out the company and Arnhult also publicly expressed sentiments in that direction. Instead, Balder surprised the market once again by buying even more, going over the 1/3 threshold and triggering a mandatory bid.
There was some market speculation of a premium, but it never made a great deal of sense as Balder likely wouldn’t want to pay a premium big enough to dislodge the Castellum shares. Ownership shares between 50% and 90% would be a bit unwieldy, since that would necessitate consolidating Entra’s balance sheet, thus affecting important capital ratios without having total control. So Balder launched the bid at the minimum 202.50 level. This time, curiously, the board of Entra issued a split recommendation, saying that owners who were concerned with “future liquidity, ownership and governance” should sell their shares to Balder or over the market if the price was higher, while at the same time essentially calling the bid too low.
In spite of this admittedly tepid support from the board, the bid only gave Balder another 2.37% of the shares, putting them at 36.53% as of this writing. Castellum clocks in at 32.32% per the latest available figures.
So what’s next? Well, both Arnhult and new Castellum CEO Biljana Pehrsson have expressed disinterest in going above 1/3. They would be extremely unlikely to increase past that level by themselves. I would however expect Balder to keep accumulating shares as long as the prices stay around this level, but their room to move unnoticed is also a bit cramped. There is another mandatory threshold already at 40%. I don’t necessarily think they care if they trip that threshold either, but they will be somewhat mindful of what prices they pay to get there, as of course the highest price paid will be the lowest mandatory price.
Intriguingly, even after the customary heavy down-selling leading up to the end of the bid window, the stock continued down Thursday. Apparently (?) some market participants had angled for a bidding war, didn’t sell to Balder when that failed to materialize (it was obvious for a long time before) but promptly needed the liquidity at all costs a day later.
Ah, Mr. Market.
This situation is rather interesting in and of itself, but some more sizzle is needed to make this really stand out as a special situation. First of all, Entra has now actually underperformed most of its closest peers since shortly before the merger possibilities were revealed last year. Even if there is no bidding war on the horizon, this doesn’t make a ton of sense when the company clearly is in play and the comps trade at significant premiums. Secondly, the valuation to NAV is still among the lowest in the Nordics in a non-distressed part of the RE sector. Thirdly, Entra’s assets are as top of the heap as you can possibly get in commercial real estate in the Nordics.
Entra’s portfolio is valued on the books at a 4.2% yield, which may sound very low but note that this is prime metro real estate with majority public customers. In Sweden, major parts of this portfolio would not be classified as CRE but as “social infrastructure” and afforded a premium.
As it happens, Entra just took part in the largest ever commercial real estate transaction in Norway, buying Oslo Areal from Gjensidige Forsikring for 13.55B NOK. The auction attracted heavy interest from both international and institutional money. Entra estimates the property management yield — adjusted for developments and land bank — at 3.4%! This may seem like a case of Entra falling for winner’s curse, but there is a valid argument against. Entra was the one auction participant with obvious and direct synergies, as Oslo Areal fits perfectly into the clusters Entra already controls in Oslo. It also makes good sense from the perspective of building economic scale, under the assumption that Entra will remain a standalone entity.
Now, the very most striking thing about this transaction is its implication for the values already in Entra’s portfolio (it also adds to the bull case for Castellum).
On the conference call presentation, Entra’s CFO said the following:
I think it’s fair to say that this transaction will have a positive impact on the existing assets that Entra has in Oslo, which will be realized either in fourth quarter or the first quarter of next year.
Entra’s current Oslo portfolio is on the books at a yield of 3.93%, so there’s ample room for revaluation with that in mind. Will they go all the way down to that 3.4% in one fell swoop? Maybe not. But please note that on the major metrics, old Entra’s Oslo portfolio has better numbers than Oslo Areal. Their Oslo WAULT is 7.2 years vs 4.7. Public sector share is 58% for the entirety of Entra vs “only” 32% for the Oslo Areal portfolio. The occupancy rate in Oslo is 97.9% vs 94.4%.
If we only assume the same yield on Entra’s management properties in Oslo as that in the Areal transaction, that would be a positive effect of about 6B or ~33 NOK per share. But presumably the non-Oslo portfolio — most of which yields about 5% — is also positively affected yield-wise by this transaction.
The most realistic breakdowns of the actual revaluations might be somewhat lowered yields across the board with a larger move down in Oslo. Overall, it is relatively easy to imagine an EPRA NRV north of 250 NOK per share in a quarter or two, along the lines of the statement by the CFO.
The dynamic of falling yields has been visible in the transaction market for a long time, while listed companies have lagged significantly in revaluing their books. This is probably a large part of what enticed Selin and Arnhult about Entra from the beginning. Balder should be extremely keen on taking advantage of the technical overhang in the stock and given current liquidity (3 million shares or 1.6% of shares outstanding changed hands in Friday’s trading) there will likely be another mandatory bid very shortly. As long as the price stays here and they are still below 50%, my guess is Balder will be in the market.
Should the share price take off to a level where Balder are not buyers any longer, they could join forces with Castellum in a JV, which would also avoid the triggering of a mandatory. A neat feature of this move is that they then will be able to accrue revaluations on their own books, which will have significant positive impact on their own equity no matter the market pricing. This helps their own capital ratios with no real downside. Assuming this JV happens while Balder is still below the mandatory levels of 40% and/or 50%, any additional share purchases by the combined entity will then once again trigger a mandatory. So in the Balder’s ideal world they may go up to 49.9% and then create a JV with Castellum. After that, they can buy one more share at a suitable price, which triggers a mandatory and then get above 90% without ever having to make a premium bid. The 1 million Krone question is how much the price will be forced to move by the shrinking float before that can happen.
To simplify a rather complicated situation: Balder is an eager buyer of the stock at current levels. Should Entra still be public in another year, odds are Castellum and Balder control +80% of the stock together. Entra’s portfolio is one-of-a-kind and will keep its relative attractiveness under pretty much all circumstances. Low-float and controlled real estate companies in Sweden tend to trade at extremely high valuations. Positive revaluations are upcoming and they provide Balder and Castellum with more leeway in a hypothetical takeout offer. I’m looking to at least a possible 25% upside in the next few months with an element of substantial downside protection.
Genuinely adverse macro scenarios obviously aren’t accounted for. If you believe in large upcoming rate hikes, then move along. But given more benign market oscillations, this looks like a situation where you don’t risk much and get exposure to some free upside. Balder will do all they can to subdue the stock price for the time being, while simultaneously grabbing as many shares as possible. If they want to ultimately take it all out, future EPRA NRV — which will be heavily revised upwards — should prove a decent target. There is also still the significantly more remote possibility that Castellum exits at a not-so-steep price due to other engagements, which would likely be another pathway to a new mandatory bid from Balder.
If on the other hand Entra is left publicly listed indefinitely (in line with Selin’s stated intent), then we should expect rational capital allocation, extremely low credit risk due to the shareholder structure and a minuscule free float on a collection of non-replicable trophy assets with majority public tenants.
A real estate company of that description traded in Sweden right now would reasonably carry a big premium valuation. Can the same happen to a Norwegian company with Swedish controlling shareholders?