Property For Industry management contract worth over $42m

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Property For Industry's management contract is worth more than the $42 million the industrial property investor will pay to bring the contract in-house, which should pave the way to higher dividends, says an independent appraisal of the deal.

Shareholders will vote on the proposal to buy the contract from PFIM Ltd, which in turn subcontracts it to McDougall Reidy & Co, at their annual meeting on June 22 in Auckland. The deal would see PFI expand its banking facilities to pay the $42m fee, and keep the existing management team made up of Greg Reidy, Simon Woodhams and Craig Peirce as managing director, general manager and chief financial officer respectively.

Independent adviser Northington Partners valued the contract at between $48m and $56m and anticipates internalising it will increase distributable earnings 5-to-6 per cent due to cheaper management fees, which should allow for higher dividends.

"The consideration and terms and conditions of the proposed internalisation are fair to shareholders of PFI not associated with PFIM and that the proposed internalisation is in the best interests of PFI," the Northington Partners report said. "This earnings increase should have a positive impact on PFI's share price to the extent that it has not already been factored into the current share price."

The shares last traded at $1.61 and have increased 1.9 per cent so far this year. The stock is rated an average 'hold' based on five analyst recommendations compiled by Reuters, with a median price target of $1.58.

The management contract with PFIM is an open-ended term, which differs from most other property investment companies in that PFI "effectively (has) no ability to remove or terminate PFIM as manager unless PFIM fails to perform its duties or becomes insolvent". The contract also ignores changes of control, and PFIM can assign the management agreement to a third party and PFI can't unreasonably withhold its consent.

"These two provisions combined mean that any party wishing to acquire control of PFI (via a takeover offer or another similar transaction) would effectively need to negotiate the purchase of PFI's management agreement directly with PFIM if it wished to change or remove PFIM as manager," the report said. "PFIM's position as manager is therefore very well entrenched and, all else being equal, is likely to act as a deterrent to potential acquirers of PFI."

If the deal isn't approved, Northington Partners said the existing arrangement could stay in place, meaning shareholders' "extremely limited rights to terminate the management agreement" would remain and they would have "limited leverage to exert pressure on PFIM to reduce management fees over time".

Alternatively, PFIM could choose to sell the contract to a third party, leaving PFI shareholders with limited control over the appointment. "Under this scenario, it would be highly unlikely that PFI would have the opportunity to reconsider internalisation for the foreseeable future at a value close to the internalisation payment, as the new manager would have a strong financial incentive to recover the full value paid for the management agreement," the report said.

PFI chairman Peter Masfen said the internalisation would remove concerns about controlling the contract and provide cheaper management fees.

"PFI's independent directors also believe that internalisation will be of benefit to shareholders and unanimously recommend that PFI shareholders approve the resolution," he said in the notice to shareholders.

Other resolutions to be voted on at the meeting are the re-election of directors Humphrey Rolleston and Anthony Beverley.