Market gives Allco's Rubicon deal the thumbs down

An independent expert's report released yesterday with a finding that Allco Finance Group's terms for its proposed acquisition of the property management group Rubicon Holdings are fair and reasonable has done nothing to stop the slide in the group's share price.

Allco's share price had fallen 43 per cent from its year high of $13.24 a share in February to its Friday close of $7.49. The announcement of the plan to acquire the 80 per cent of Rubicon it did not already own has done nothing to help the ailing stock.

It has fallen 15 per cent since the announcement of the deal on October 23 and it took another tumble yesterday, down 34 cents to a close of $7.15.

The cash and scrip offer was made when Allco's shares were worth $8.90. The cash component of the deal is $62.7 million and the scrip component 23.9 million Allco ordinary shares. A further 5.8 million Allco convertible redeemable preference shares will be issued to the vendors and converted to ordinary shares if certain conditions are met.

The main benefit of the deal is that it would increase the size of Allco's real estate assets from $3.9 billion to $9.1 billion.

The independent expert, Grant Samuel, says in its report:  "The acquisition meets a clear need to strengthen Allco's real estate division… Allco faces a number of challenges to expanding its footprint to operate on a global basis. The acquisition of Rubicon provides a substantial enhancement to the division's capabilities.

"The strategic and other benefits mean the non-associated Allco shareholders are likely to be better off over the medium to longer term if the proposed acquisition proceeds than if it does not."

A report on Allco by Macquarie Equities, published on October 26, summed up the mood of the market, saying: "The purchase price appears to be far too expensive."

Macquarie estimates that the bulk of Rubicon's $35.3 million net profit in 2006/07 came from the origination of new assets under management. Only about 30 per cent of earnings came from asset management. Rubicon manages Rubicon America Trust, Rubicon Europe Trust and Rubicon Japan Trust --- $5.2 billion of assets in total.

All three trusts are listed and all three are trading below the prices at which they were issued.

Macquarie does not believe that Rubicon can generate the same level of origination fees in the current financial year. "Replicating 2006/07's origination earnings would have been very difficult based on the poor market performance of the existing vehicles… With all three trusts' cost of equity now too high and the existing vehicles highly geared, it would be very difficult for Rubicon to source yield-accretive acquisitions…The growth profile appears constrained."

Allco shareholders will meet on December 12 to vote on the deal.

Allco executive chairman David Coe owns 19.9 per cent of Rubicon. Other major shareholders are Rubicon directors Gordon Fell, with 44.9 per cent, and Matthew Cooper, with 14.8 per cent (Fell is also an Allco director).