centro us sale under fire

A CAMPAIGN by a group of shareholders that own more than 11 per cent of Centro Properties Group to force Centro to put the planned $US9.4 billion sale of US shopping centres to a shareholder vote is poised to escalate. A key member of the self-styled Centro Shareholders Association is threatening legal action to force Centro to hand over information about the deal, and the financing arrangements on the US properties.

If the action is successful, the shareholder group will consider whether it has grounds to legally press for a full shareholder meeting on the deal, creating another hurdle for Centro.

The CSA has hired prominent Sydney lawyer John Atanaskovic to consider its legal options, media relations identity Marty Dougherty is also involved, and letters between Atanaskovic's firm, Atanaskovic Hartnell, and Centro's lawyers, Freehills, are piling up. After an inconclusive meeting with Centro, the CSA has also contacted the ASX and the Australian Securities and Investments Commission asking why the huge property sale does not require security holder assent.

Advertisement: Story continues below Centro announced on March 1 that it would sell all the Centro Group's US assets to private equity company Blackstone for $US9.4 billion, and had entered into discussions with lenders to the group, its stablemate, Centro Retail, and with investors in various Centro Property joint ventures aimed at amalgamating Centro's remaining shopping centre assets in Australia into a single company.

The Centro Properties Group said at that time that a variety of stakeholder approvals and consents for the complicated restructure were required and that there was no guarantee the deals would go ahead.

It said Centro security holder approval would ''be required'' - but it is believed to have obtained initial agreement from the ASX that security holder approval is not required for the large US property sale that begins the process, only for the Australian amalgamation of Centro Property Group and Centro Retail, if it occurs.

Listing rules that have the force of law state that the ASX can require a company to seek shareholder approval for deals that result in a ''significant change ? in the nature or scale of its activities.'' The $9 billion-plus US property sale appears on face value to qualify.

However, Centro is believed to have told the ASX that the relevant dollar value, for the purposes of the listing rules, is not the gross value of the deal, but the value that flows to Centro after debt tied to the US shopping centres is repaid - about $600 million.

Centro is also believed to have argued that the financing of the US assets involved pledges that ''ring-fenced'' cash flow generated by the US properties.

The restructuring centres on a debt-for-equity swap that would see Centro extinguish its existing debts, and Centro lenders emerge as the principal shareholders in a new, amalgamated Centro that combines ownership of Australian shopping centres now divided between Centro Properties, Centro Retail and private investor syndicates.

Centro and its lenders (hedge funds that have acquired the debt at discount to face value from the banks that originally advanced the money) have agreed that as part of the restructuring, $100 million will be made available for distribution to stakeholders who rank behind the core lenders.

But the groups in line for some of that money include parties to the class action against Centro over the group's near-collapse, and some Centro noteholders. It is not expected to release significant amounts of money for distribution to shareholders. One aim of the legal push is to give shareholders additional leverage that could lead to a larger payout within the restructuring deal.

The legal action is being led by Smartec Capital, a private company associated with Margaret Lou. Smartec is a relatively small Centro shareholder, with a stake of about half a per cent, but is part of the CSA, a group of investors that appeared on Centro's share register early in 2009, and own more than 11 per cent of the company's securities.

The CSA has been attempting to gain leverage for its stake from early 2009, and has unsuccessfully sought Centro board seats and proposed alternative financing structures. It is now pressuring Centro at the same time as ASIC's civil action against Centro directors for misleading the market about Centro's financial position looms (that case is scheduled to begin on April 4).

In letters sighted by BusinessDay, Smartec has argued that Centro has a future even if the US properties are not sold - an argument strongly rejected by Centro's law firm, Freehills.

It was clear by the time Smartec and its affiliated investors bought in that Centro was in trouble, and that the financial pressure was greatest in the company they bought into, Centro Properties.

Centro Properties had disclosed ''a significant uncertainty'' about the group's ability to continue as a going concern by early 2008, and has been reporting negative net equity from its December 31, 2008, accounts onwards.

The most recent estimate, at December 31 last year, was that there was an equity shortfall of about $1.6 billion.

A debt stabilisation agreement announced by Centro in December 2008 set out plans to issue convertible securities to debt holders that, if converted, would deliver them control of 90.1 per cent of the company's expanded capital, and dilute existing security holders to a combined stake of less than 20 per cent.

But the fact that the investors made a bad investment when they bought into a clearly distressed Centro is unlikely to be a factor in any legal challenge asserting that shareholders have the right to vote on the deal.