Open Letter to the Board of Realia Business S.A.

LONDON, Nov. 21, 2018 /PRNewswire/ -- 

Mr. Juan Rodríguez Torres
Chairman of the Board
REALIA BUSINESS, S.A.
Av. Del Camino de Santiago, 40
28050 Madrid

Dear Mr. Rodríguez Torres:

We refer to the €149 million capital increase that Realia Business, S.A. ("Realia" or the "Company") is proposing to carry out, as announced by the Company on November 15 in an hecho relevante, as amended and complemented on November 16 (the "Capital Increase").

In this regard, we wish to convey to you our concerns in relation to the Capital Increase:

1. First, the Capital Increase represents more than 25% of the market capitalization of the Company.  Yet Realia has not announced or otherwise provided to its shareholders, nor to the market, any detailed reason, strategic, financial or operational, to explain its reasons for the Capital Increase, other than the vague statement that it is intended "to reduce the debt and finance the development of the real estate business."

Additionally, no information has been given as to how its terms have been approved by the Board and on what basis the proposed issue of 175.45 million shares in the Company at a discount of 7.5% to the current share price and of 35.6% to the Company's last published NAV may be said to be in the best interests of the Company as a whole.  As such, the provision of information to date is plainly inadequate to allow shareholders and third-party investors to make an informed decision as to whether or not to subscribe to the Capital Increase or the degree to which this transaction may be attractive.

Accordingly, we ask you to release without delay the reasoned opinion of the Board as to the justification for the Capital Increase, the intended use of the same by the Company over the short and medium term, and why raising money at such a deep discount to the NAV is ultimately beneficial for the Company and its shareholders.

2. Second, we are concerned that the Capital Increase does not respond to a reasonable need of the Company and, as it has been framed so far, could potentially constitute a serious disadvantage to the Company and its shareholders. The reasons why we consider this are as follows:

(a) The Company does not need a capital increase. Following the last refinancing announced in June 2018, there has been no further indication or declaration from the Company as to its capital needs. Indeed, the Company had, as of the end of September 2018, a net debt of EUR 672.7 million, compared with a total net asset value of over EUR 1.8 billion, i.e. a leverage ratio of roughly 37% of debt over assets. This leverage ratio is closer to 32% when the net asset value of the Company is calculated using the RICS methodology in line with peers. This metric is well within the norm of other Spanish real estate companies in the market. By way of example, Colonial has a ratio of 37.9% as of September 2018, Merlin has a ratio of 43.3% as of June 2018, and LAR Real Estate has a ratio of 31% as of September 2018.  

(b) Unlike its peers, Realia's Capital Increase is being carried out at 35.6% discount to the reported NAV of the Company (€0.85 per share vs. last published NAV of €1.32 per share).  This discount is even more marked—in excess of 50%—in light of what we believe is the correct NAV of the Company, based on the RICS methodology, which is a figure in excess of €1.70 per share. The Capital Increase will thus very significantly dilute the value of the position for those shareholders who may not be able to subscribe to it, for whatever reason.

(c) We cannot understand at present the reason why the Board has reached the conclusion that the Capital Increase, at such a deep discount to the asset value of Realia, is more interesting for the Company and its shareholders than a possible sale of certain non-strategic assets of the company at market value, that could easily raise the same amount of funds for Realia.

(d) The lack of information as well as the deep discount to the underlying value of the assets raises concerns that the Capital Increase is a transaction that bears no relation to the underlying value of the Company's operations and is likely to result in an artificial depression of the Company's stock price. 

3. Third, we believe that there is a gross asymmetry of information among shareholders. Both Fomento de Consrucciones y Contratas (FCC, controlled by Grupo Carso) and Inversora Carso are represented at the Board and on the management team by virtue of the position of the CEO (Mr. Gerardo Kuri-Kaufmann, an employee of Grupo Carso). Both shareholders thus have complete information of the reasons for the Capital Increase, the use of the proceeds and the short and medium-term value creation prospects of the company. The rest of the shareholders have received no communication about these financial prospects (no business plan, presentation, conference call or even a simple use of proceeds analysis) and can thus not reasonably reach a proper conclusion about the value of their shares. 

We are disappointed that despite the assurance we received from the CEO on 27 June 2018 that regular conference calls would be held at which the Company would explain its plans to shareholders, we have heard nothing from the Company in relation to the Capital Increase or indeed anything else since that date.  We trust that the Board will now provide more detailed information to the market of the Capital Increase in accordance with our requests and that this will clarify our serious concerns about the proposed Capital Increase.

Sincerely,

Polygon Global Partners LLP

Media Contact: [email protected]

SOURCE Polygon Global Partners LLP