Property moguls wrestle for control of REO

In February of last year solicitor turned property developer Noel Smyth went to see property development duo Johnny Ronan and Richard Barrett. He had a proposition concerning a few hundred million euros worth of Irish and British property.

Ronan and Barrett are the owners of Treasury Holdings Ltd (THL) and directors of Real Estate Management plc (REO), a Jersey-registered property and investment company that has a significant portfolio of Irish properties. REO is approximately 37 per cent owned by Treasury.

Smyth had had dealings with London-based entity Dawnay Day concerning Irish properties in which it had an interest. Dawnay Day was the second largest shareholder in REO, owning just under 30 per cent, and Smyth thought he saw the potential for a property deal.

Having discussed the matter with Dawnay Day, he went to the Treasury duo and made his proposal. He had an option on the Dawnay Day holding in REO, he told Barrett and Ronan. What about he and Treasury getting together, taking over REO, and turning it private?

The Treasury duo did not want to do business with Smyth. Not only did they fail to react to his proposal, they reported him to the Takeover Panel, complaining that Smyth (who had no shareholding in REO at this stage), was acting in concert with Dawnay Day in relation to REO.

Despite this reception, Smyth did not drop his interest in REO or its property portfolio. In July 2003 an opportunity came up to buy a significant number of REO shares and Smyth went for it, buying close to 10 per cent of the company for €9 million. The purchase meant that Smyth and Dawnay Day together held more of REO than Treasury. There was now a rump camp in the REO shareholder base.

Relations between Smyth and Treasury are not great, to say the least. At the REO agm in the Grand Hotel, St Helier, Jersey this week there were terse exchanges between Smyth and Barrett. At one stage Smyth asked Barrett if he, Barrett, had "something to hide" in relation to a mystery shareholding held by an Isle of Man company. Barrett, during another exchange, said to Smyth: "Am I speaking slowly enough for it to get into your head?"

REO was a complex and ambitious project set up in 2001 and designed to run for 10 years. The £800 million (€1.3 billion) vehicle was to be a quoted split capital investment trust, with two asset classes: property and high:yield bonds.

The property was to provide capital growth while the bonds would provide an income stream to pay dividends. Shareholders, who bought in at £1 a share, were to receive a dividend of 8.8 per cent a year.

All has not gone according to plan. This week the company's shares were trading at 48.5p and there was no dividend for 2003. It has a current market capitalisation of €266 million.

As part of its establishment REO bought properties from Treasury and also acquired Jermyn Investment Properties, a quoted British property company in which Barrett and Ronan had an interest. REO also bought Castle Market Holdings, a 50/50 joint venture owned by Treasury and Jermyn.

A company called Havenview was set up in Ireland. It was a 50/50 joint venture owned by Treasury and REO, and it bought Irish property worth approximately €65 million from Treasury. The shares held by Treasury in Havenview gave it the right to appoint a majority of the Havenview board. Also, Treasury was appointed to manage the assets of Havenview, a role carried out by the international firm Invesco in relation to REO's UK properties.

At Tuesday's a.g.m. the REO chairman, Mr Ray Horney, said the Havenview joint venture was set up to share the risk involved in the Irish property development projects. Ironically, it is the Irish property development projects that have worked out well for REO, while the second asset type, bonds, have bombed.

The scale of the fees paid to Treasury for managing REO's Irish properties and pursuing Irish development projects in 2003, €11 million, was a bone of contention at the Jersey a.g.m., though Horney said the deal with Treasury was comparable with other such deals in the property world. The fees compare with REO profit before tax for 2003 of £31.5 million.

Aberdeen Asset Management was another large shareholder in REO in 2001. It was to manage REO's non-property investments, which have worked out so badly. Aberdeen is now being pursued for damages by REO in relation to the losses on the investment portfolio.

There are a number of aspects concerning REO, and Treasury's role in it, that have been the subject of complaints voiced by Mr Guy Haggar, chairman of Dawnay Day. He is concerned about what he sees as the dominant role in REO played by Treasury and about a €40 million loan from REO to Havenview which, as already noted, is 50 per cent owned by Treasury. He is furthermore irritated by the non-payment of a dividend while such large fees are being paid to Treasury.

A further issue was a practice whereby REO was buying back its own shares from the market and cancelling them. Treasury, for reasons associated with its shareholding size at the foundation of REO, is not obliged to make a bid for the company despite owning more than 30 per cent. When REO was buying back its own shares, this had the effect of increasing Treasury's percentage shareholding. Dawnay Day, however, had to keep watch that its percentage shareholding did not exceed 29.9 per cent, in order not to have to make a bid for the company.

On Tuesday, however, the vital issue was control. Michael Chadwick, chairman of Grafton, owns a small percentage shareholding in REO. He put the matter well on Tuesday, pointing out that Treasury held approximately 37 per cent of REO, Dawnay Day held just under 30 per cent, and Smyth around ten per cent. The next largest shareholding was held by Calyx, which holds a little over 8 per cent. However, it is not known who lies behind Calyx.

Given that Smyth and Dawnay had voted together before, Mr Chadwick said, it beggared belief that any board "acting for all the shareholders" had not taken steps to establish who owned Calyx. A lawyer acting for Dawnay said REO's articles of association were not being policed by the board, as Dawnay had requested that the beneficial owner of the Calyx shares be identified.

Horney disputed the lawyer's interpretation of the matter. The lawyer said Calyx could be "disenfranchised" if it refused to reveal who lay behind it. Horney said the board would consider the matter.

Calyx is registered in the Isle of Man, where it has an address c/o Anglo Irish Bank.

Intriguingly a new shareholder in REO became known on Wednesday. Dermot Desmond, by way of his IIU Ltd, has taken out a small shareholding in REO. Desmond was involved in Dunloe Ewart two years ago, when Liam Carroll wrested control of that property company from Smyth. Smyth had to depart the scene, although he did take €30 million with him arising from the sale of his Dunloe Ewart shares. Some of that money, no doubt, was used to buy into REO.

There are no doubt a few more twists and turns to come yet in this latest drama from the world of property plcs.