MCK - Millennium & Copthorne Hotels NZ Limited

[Interested321]

Thanks for the great discussion.

I share your concern about the redeemable preference shares.  If we only get the $1.70 indicated in the letter on 3 February 2025 then it is well below the fair value of them (mid-point $4.70).  This would impact me (as I own redeemable preference shares) as well as ACC. 

This potential "profit" for MCK by doing this should be added to the value of the MCK shares - and it has not been so far.

As raised by other members there are other aspects that could increase the value of the MCK shares.  As mentioned by other members there are concerns that M Social in Auckland is not fully valued.  It occupies prime land in Auckland and there have been recent hotel sales in Auckland at high valuations.

MCK also has valuable land in Queenstown.  This area is prospering and rapidly becoming a big international destination.  There have also been record sales there.  For example, Base Backpackers was sold for $31 million.  MCK has three hotels in Queenstown.  Many of these have lake views.  Surely these must be worth several hundred million dollars.

I believe these, and other factors mentioned in this chat, indicate that MCK ordinary shares are worth significantly more than $4.70.   


   

[Playa]

Goodson sold all 1,485,441 MCK shares Salt held into the $2.80 offer at the end of April last year

He's not the sharpest fund management tool in the shed I reckon

Weren't Salt the top performing fund managers in 2025?No one gets it right every time

[Southern Lad]

I've made some tweaks to my post from last night, mainly referencing the 2025 Target Company Statement.

[Basil]

My opinion is that preference shareholders are in a very weak and vulnerable position which is why I have chosen not to own any.
Certain discussions transpired after the annual meeting last year but I am not at liberty to break the confidence of what was said and by whom to me about them or what was suggested other than to say that, it would have been easy for preference shareholders to work together to, putting this politely, "encourage each other to facilitate a more liquid market in these shares" but I think preference shareholders quite rightly may have concerns about whether this amounts to market manipulation.  That's the reason why I didn't get involved with the preference shares or any scheme of arrangement to change the share price of them.

What I can say is that ACC are acutely aware of the valuation uplift on the ordinary shares knowing that CDL can unilaterally exercise redemption of preference shares from within the companies existing debt resources subsequent to any takeover of the ordinary shares.  How they will negotiate on this point is anyone's guess but if you are a believer in following the money then that would suggest based on their relative sized shareholdings in ordinary shares, (recently significantly increased) and the size of their preference shareholding they should in theory be looking to optimize the outcome for ordinary shareholders.

The independent valuation did not really address this point in detail but clearly if fair value for all 158.218m shares was $4.70 last year, (total net value $743.6m) and they were assuming preference shareholders get the same payout as ordinary shareholders under a windup valuation, on a going concern basis if the 52.739m preference shares are redeemed at $1.70, total redemption value 52,739m x $1.70 = $89.66m) that leaves ($743.6m - $89.66m) = $653.94m fair value for 105.44m ordinary shares = fair value per ordinary share of $6.20 after taking into account the advantages of dirt cheap RPS redemption.

I think there's also surplus land at some of those Queenstown properties that they're looking into as to how to optimize value for the company and also its well known that the M Social property in downtown Auckland is in play.

Before we all get too carried away with all the positive valuation theory I think we need to keep in mind that based on the interim report of CDI property and prevailing market conditions in the real estate market since then, its likely that CDI have had a very weak year and their outlook is probably best described as muted.

All that said maybe a takeover offer of five dollars something is not something unreasonable to hope for ?

MCK will have to report by 27 February, (last year they reported on 24 February) so we'll know more shortly in terms of how the company is performing.

[Southern Lad]

Basil I agree with your view that RPS holders are in a vulnerable position.

Having read a bit more of the Target Company Statement, I see Northington Partners at paragraph 4.2 of their report (pages 27 and 28) offer the view that ".... the total economic interest held by CDL in MCK will be maximised if the RPS are not redeemed". 

So while CDL's position in their 2025 takeover attempt was that they may redeem the RPS, there is a significant risk that they wouldn't do so post 100% ownership of the ordinary shares.  Further, they could cease paying dividends (extracting cash by loan or purchase of additional assets from CDL) resulting in RPS holders being locked into a share that produces no yield and has no guarantee of long term value uplift due to the redemption rights CDL have.

[Basil]

Yes that's quite at odds with the statement from the Chair at page 8 though.   
For what its worth I'd be surprised if ACC didn't include in their negotiations a deal for preference shareholders.  They wouldn't want to remain as minority shareholders in the preference shares in a takeover situation any more than you or anyone else would. 

[Crackity]

Yes that's quite at odds with the statement from the Chair at page 8 though.   
For what its worth I'd be surprised if ACC didn't include in their negotiations a deal for preference shareholders.  They wouldn't want to remain as minority shareholders in the preference shares in a takeover situation any more than you or anyone else would. 

ACC had 935,848 of the prefs mid last year

They are very infrequently traded so they probably still have them all

[Interested321]

Thanks for the ongoing discussion.  I think we can agree that whatever way we look at it City Developments is getting a bargain. 

I agree with the comment by Basil that you could argue that a fair value for MCK is $6.20 (taking into account they pay $1.70 for the Redeemable Preference Shares).  I still think this is undervalued given the potential value of M Social, the three Queenstown Hotels and the vacant property in Queenstown.  I agree that CDL Investments may have had a bad year in 2025 coinciding with the nadir in the property market.  However, the CDL annual report in 2024 reported the Net Tangible Asset value per CDL share at $1.10 - yet the shares are selling at $0.77.  Also, companies normally pay a premium for control.  Given this I believe the value of MCK ordinary shares should be considered at $6.20 and possibly more than that.   

[Basil]

They've had a very good and busy year, share price up more than 90% and trading at 0.95 times book value.
https://sg.finance.yahoo.com/quote/C09.SI/
No reason they can't pay a fair price to takeover the modest number of remaining shares they don't already own in MCK.  However, If as I suspect they have tried to low ball holders at $3.30 per my earlier post, they're unlikely to come back with a fair offer in the very short term so some patience will be required here if you want a good price for your shares.

[Basil]

Crickey, I just realised CDLmay be able to takeover MCK for $0 of their own cash outlay.

The company has a $120m banking facility.  If they used that to redeem the preference shares at $1.70 with CDL holding 91% that would give them enough cash to takeover the 16% ordinary shares they don't own.

I'll put some numbers on this when I get to the office.

P.S. Really brief back of the envelope calculation.  It costs $89.66m to redeem the pref shares at $1.70, which can be self funded from $120m line of credit banking resources so CDL gets 91% of that = $81.6m.  That would self fund a takeover attempt of the ~ 16.9m ordinary shares they don't own at $4.83 per share.  But I think after recent discussions around how the pref share redemption boosts the value of the ordinary shares, the question for ACC to ponder is this, Is $4.83 a share enough ?  (Note, we probably won't get a say in this or need to answer that question ourselves.  If / when there's a takeover deal announced it will be with ACC support and it will most likely already be a done deal).

[Southern Lad]

Another aspect to throw into to mix - MCK currently has a board that has a majority of independent directors (or depending on the true status of Stuart Harrison the Managing Director, not a majority of CDL directors).

Any decision to redeem the RPS would need to supported by the MCK board as being in the best interests of the company and also supported by CDL as the holder of more than 75% of the RPS.  So as it stands, any desire by CDL to redeem the RPS may not meet with MCK board approval.  If a takeover was successful and MCK was delisted, then I assume the board is replaced with CDL nominees, which may change the view.  As it stands, it may be difficult to argue from MCK's perspective that redemption is in the company's best interests.

There was a late change at the 2025 ASM where ACC requested Graham McKenzie reconsider and stand for reelection whereas he had previously indicated he was not standing.  He indicated he would do another year until the 2026 ASM, however that is sneaking up soon enough.  CDL voted in favour of his reelection. It will be interesting to see what happens - do we go down to five directors, two independent, two CDL and the Managing Director?  The NZX listing rules require a minimum of two independent directors with a recommendation (but not an obligation) that the majority be independent - see https://www.nzx.com/services/listing-on-nzx-markets/equity/listing-requirements

Assuming that CDL can influence when and whether the RPS are redeemed, they face a dilemma as to whether it is triggered now at the attractive price of $1.70 compared to the explicit increase in the value of the ordinary shares should this occur which would no doubt increase the fair value that an independent expert would determine.

A big question is whether the RPS remain listed if CDL owns all of the ordinary shares.  Quite a lot of compliance cost associated with this.  Can they delist the RPS, and if they do, what is the process to alter the redemption price formula?  Could the RPS listing be moved to Unlisted or Sydnex?

Therefore as Basil points out any deal that ACC negotiates with CDL will likely include a resolution (or an escape route) for the RPS holders.  Question is whether ACC happy to boost the value of the ordinary shares (which they own a greater percentage of) at the expense of the RPS value or whether a fairer outcome for all is their priority.

For anyone brave enough to take a punt on the RPS, there are currently 5,800 listed for sale at $1.78 (and 20,000 at $3.35!).

[Basil]

For anyone brave enough to take a punt on the RPS, there are currently 5,800 listed for sale at $1.78 (and 20,000 at $3.35!).

Too much bravery required for my liking but gosh, it wouldn't take much to move the 20 day VWAP.  The only trade on any slightly meaningful number at all has been 5,000 pref shares on 28 January at $1.70.

[Stoploss]

From todays release..... I'd be happy with $ 5 + .....

"Fair market value of hotel and properties assessed at $1.1b. Net asset
backing per share on market value basis assessed as $5.24 per share *
Fully imputed dividend declared of 3 cents per share, payable on 15 May 2026
MCK's chairman, Colin Sim, said: "This was another set of strong results from
our key Hotels business, validating our execution to date and signalling the
transition from the Revive to Thrive phase of our hotels' strategy. We have
continued to grow the value of our portfolio, through both our long-term
refurbishment plan as well as disciplined investment to expand our footprint."

[Scooter]

Interesting time to release results. 
When you posted them I thought how did I miss them this morning

[Basil]

Fair value of shares is $5.24 but that includes the preference shares which can be redeemed for $1.80.

I'm away from my office so can someone please work out what the fair value of the ordinary shares are taking into account redemption of pref's at $1.80.

Just doing the sums in my head going off memory from the number of ord's and pref's on issue it looks like almost $7 !