British Land

Question 1: Why Laxey is targeting British Land? What criticisms has Laxey made? Why?

John Ritblat, being the CEO and chairperson, is running British Land since his joining in 1970’s. He managed to run the company successfully and raising up to the second largest property company in United Kingdom (UK). But now, Ritblat is facing some challenges from the rival company in regard to its financial performance and its share prices, and its future consequences.

The rival company is a newly formed hedge fund, Laxey partners, is targeting to stir up Ritblat’s management style as well as the British Land. In accordance with this, Laxey criticized Ritblat’s management style and the position of the company in the market by raising three resolutions, which he want to raise in the upcoming Annual General Meeting (AGM).

Firstly, Laxey brought forward the resolution to commit British Land to buy back its shares, at least 10% of its stock at rate of 723p. This is because the currently trading price of British Land shares was at discount of around 42% to its net assets value. Therefore, the price do not reflect the true value of the company. By buying back the shares, the supply of shares in the market will be reduced and so will raise the share prices. This shows that although the performance of British Land under the leadership of Ritblat is good, but, the true reflection of its value is not reflected in the share price which can lead to purchasing of company’s shares at high discount, even, up to 30% can still give the acquirer higher value over the consideration paid.

Secondly, Laxey also proposed that British Land should buy back shares on half yearly basis if the discount of the share price increases to net asset value exceeds by 15%. This can be very severe proposal as currently British Land is already operating at 42% discount, and it will be very difficult for Ritblat to control and reduce the discount to this level. Apart from the fact that, it is not in the policy of the company to buy back shares. Furthermore, the plans for buy back are also required three months after the AGM. Contrary to this, Laxey has argued that this buyback will result in increase in gain for the investors.

Third proposal put forward by Laxey requiring British Land to hire specialists outside managers to manage different parts of wide ranging portfolio of the company. This is rather an argument related more towards the management of the company’s operations, than to company’s performance or shareholder value. As it’s up to Ritblat whether he considers extra managers to be employed for these parts of the portfolios or not. Currently, Ritbalt has managed to run the business successfully with the existing management team and therefore this argument seems to be of lesser value to shareholders because most of them are already satisfied with the management style of Ritbalt.

The main reason behind Laxey criticizing Ritbalt is to bring him down, as he know that Ritblat would not give up control of his company easily. Although Kingsnorth and Ritbalt both saw the proposal as amounting to a straight liquidation of British Land overtime.

Question 2: Is British Land undervalued? If so, what are British Land possible responses to this? Why might they work or not?

Referring to Exhibit 4, it can be clearly seen that the market capitalization of British Land is almost 60% of the net asset value (NAV). This confirms the argument raised by Laxey that the share price does not reflects the actual net asset value of the company. Hence it can be concluded that British Land is undervalued.

When determining the possible responses for this, one of the most effective solution, argument made by Laxey about buying back the company shares can be considered. This is one of the foremost possible responses that may help in controlling the share price in accordance with the net asset value of the company. Buying back company’s shares will tend to reduce the supply of British Land shares in the market and so will result in increasing the demand for shares and finally increasing the share prices.

Although, the overall market is under recession which definitely leads to undervaluation of the related companies. But the level at which British Land is undervalued seems to be adverse among all. Apart from the fact that British Land is the second largest company after Land securities, with third lowest beta in the market representing the low risk profile of the company. This can be favorable in terms of creating confidence of the investors and so the undervaluation problem might reduce in future when market rises.

Moreover, the short and long term debts of British Land seems to be high, as one of the convertible loan notes are near to their maturity for which the possibility is that these notes will then be converted in to shares, hence diluting the shareholder value. Due to this, shareholders might be expecting a future conversion of these bond and as a consequence they are waiting for the event to occur, affecting the demand for shares of British Land potentially. British Land has already announced to redeem these bonds before maturity date which may result in the consequences of dilution of shareholder wealth. And so until this transaction, the share price may not be raised significantly.

Keeping all the responses under considerations, British Land should continue with the business regardless of what its share price and market capitalization currently shows. This is because it is one of the top real estate companies of UK and still operating profitably. The responses taken to manage the stock prices will be incorporated gradually once the market raises to its level again.

Question 3: As a shareholder of British Land, would you vote for any of Laxey’s three resolutions? What changes, if any, would you want to see in the company’s strategy?

Being the shareholder of British Land, close consideration of the resolutions given by Laxey would be required. As all of the resolutions may not exactly work for British Land as required. Taking each resolution in turn, the interpretation with respect to shareholders will determine whether I would vote for his resolutions or not.

Resolution 1:

The first resolution to buy back 10% of the stock of British Land can be seen mainly from two perspectives, whether this will have any tax implications to future returns to shareholders or will it affect the company’s debt to equity and debt to asset ratios (Exhibit 4).

The debt to asset ratio of the company is quite higher that targeted. Which shows that many of the assets are backed by debts, which can be a demoralizing sign for any shareholder. Comparatively, the debt to equity ratio shows that debts are lower than targeted ratio of 1 (100%), this can be a positive sign as company still have managed the debt to equity ratio in order to tackle with 30% corporate tax rates and utilizing lower cost capital, i.e. debts. From the shareholder point of view the decision making can differ from shareholder to shareholder as some are more enthusiastic to have higher dividends, whereas, others anticipate higher capital gains.

Buying back shares would reduce the equity, leading to rise in debt to equity ratio to 102%, this can have serious consequences to shareholders view about the company. As shareholders will lose confidence in the company of rising debts. Additionally, their investments would be at greater risks as compared to other related companies, such as, Land Securities because if company were to liquidate in future all of the ordinary shareholder investment would be at stake of being paid in the end after fulfilling the debt holders’ debts.

Therefore, I would not vote for this resolution as it may have adverse consequences on the market capitalization of the company.

Resolution 2:

Second resolution is again in line with buying back of shares semi-annually if the discount between the share price and net asset value is above 15%. However, this option might be beneficial if British Land were to reduce its debt obligations and improving the financial ratios under the target may help in this case further. Therefore, this resolution can also not be voted until it have any solid implications or certainty of having positive results.

Resolution 3:

The third resolution is about hiring specialist managers to manage different parts of company’s wide ranging portfolios. This is a management related option that might not directly impact the company’s image. But, analyzing from past successes of Ritblat, it seems as if company is already operating well and may not require additional hiring of managers.

Conclusively, being company’s shareholder I would not vote for the given resolutions by Laxey. However, further changes in company’s strategy can help to improve its position in future, such as, through capital restructuring or through tight management of raising debt capital, keeping in mind the clientele of shareholders it has.

Question 4: What are the corporate governance ‘problems’ at British Land? Why do shareholders care about corporate governance?

In reviewing the corporate governance issues at British Land, it can be clearly determined that the company does not follow the corporate governance as required by UK listed companies. Even more, the company is found employing the directors that were previously in cases of breaching the corporate governance rules.

Firstly, the CEO and chairman of the company, John Ritblat, is himself breaching the corporate governance rules acquiring both designations at the same time. Furthermore, his son, Nick Ritbalt was also found as being the deputy chairman of the company which can bring in the biasness in decision making due to family relations at board level.

Furthermore, British Land has failed to provide the formal analyst presentations in the past three years, which means that inadequate reporting to financial statements and disclosure notes must have kept shareholders uninformed about the actual position of the company and its corporate governance procedures.

Altogether, the position of chairman and CEO acquired by the same person, appointment of family member as a board of directors and offering high salaries to them (as shown in Exhibit 10a), same board of members having representation in all committees such as, audit committee, remuneration committee, etc. hiring of non-executive directors who are already working in another company to which British Land receives services from. These all represent that British Land does not carry out corporate governance activities, though, being listed in UK stock exchange. Making this a great problem for British Land in order to face the pressure created by the resolutions put forward by Laxey and through his campaign to gather shareholder confidence to vote his resolutions at AGM.

The shareholders are now coming to realize the fact that the investments they have made are at risk and what they were believing to have invested in the second largest real estate company of UK. Of course, shareholders do care about the corporate governance of the company they have invested in, as the consequence of large corporate scandals like, Maxwell Batley, etc. the shareholders are now more concerned about hoe the company is governed and whether they have separate committees to ensure that fair and effective running of the company.

Question 5: Do you regard British Land a successful global real estate company based on its latest corporate performance in recent years?

Analyzing the financial statements of British Land over the period of time (Exhibit 2, case study) growth can be seen from the year 1993 to 2002, though, it fluctuated in 2001, but again increased in 2002 to a sufficient level i.e. ₤159 million. Furthermore, comparing the results of British Land with that of other related companies, it is earning stable profits bein the second largest real estate company, though CWG has tend to be earning more profits and may take the position of British Land in near future. Although, BL has higher operating profits as compared to CWG, but having higher interest payment obligations the net profit after interest and tax falls behind CWG’s profits.

The statement of financial position of British Land shows an overview that its long-term debts are continuously rising from 1993 to 2002 whereas equity shares also rose from ₤59 million to ₤130 million until 1999 and constant thereafter. Increase in short-term borrowings over the period of time can also be a possible reason for rising interest costs for BL. On other hand the investment property currently under possession of BL shows that a heavy amount of cash is blocked in investment properties and due to recession time period BL is facing challenges with respect to its stock prices.

Nevertheless, the financial position being stable over the time period of analysis does not only comprise of the total corporate performance of BL. In addition, the rules and regulations laid by the market such as, corporate governance rules, etc. are lacking in the management of the company which can be a sight of severe future consequences for the company of not complying with the laws, which can result in bad publicity of the company as well as loss of shareholder confidence in the company. Therefore, the company needs some strategic changes in the management in order to become a successful global real estate company.