Case study of a sale and leaseback advisory transaction in Poland

1. Workshop on
Sell-Side M&A
Higher School of Economics, Moscow
1 December 2012
Presented by
Leighton Peter Prabhu, BCom MPhil CA CPA
Managing Partner, Interstice Consulting LLP
Board Member, Canada-Eurasia-Russia Business Association (CERBA)
Member, Global Strategy & Leadership Alumni Panel, McGill University

2. Session objective
To provide participants with “virtual” experience in
M&A advisory through review of an actual sell-side
transaction, and an opportunity to ask questions of
an experienced transactor
2

3. Role of financial advisor
• “Pilot” for the transaction
• Coordinate communications
• Develop the offering and
market the transaction
• Assist with negotiations
• In general, bridge gaps
between buyer and seller in
the interests of closing the
transaction under the most
favourable terms to the
seller
3

4. Typical conflicts
• Price
• Timing
• Due diligence period
• Due diligence access to
materials
• Buyer’s financial backing
• Seller’s representations
and warranties
4

5. Transaction overview
Baltic Properties Trust
has acquired a
€168,000,000
commercial real estate portfolio
from
Telecom Poland S.A.
August 2008
This announcement appears as a matter of record only.
5

6. Transaction background
• Seller: Telecom Poland / Orange Polska
• Former state-owned telecom monopoly
• Publicly listed on the Warsaw Stock
Exchange
• 33 000 employees
• Majority controlled by France Telecom
• New campus project “Miasteczko” to
house all Warsaw office-based
employees
• Sale of legacy buildings part of “Asset
Base Optimization” strategy
6

7. Macro environment
• Real estate considered a
stable asset class
• Poland - Eastern Europe ‘Lite’
• Uninvested funds
• Incentives to deploy
• Shortage of quality, occupied
properties in prime areas
• 2008 - pre GFC
7

8. Process
• Pre-mandate
• Seller due diligence
• Defining the transaction
• Marketing the transaction
• Bid evaluation, preliminary
negotiations
• Buyer due diligence
• Final negotiations
• Closing
8

9. Transaction team
Advisors
CFO Financial advisor
Transaction Legal advisor
committee
Project manager Industry advisor
9

10. Offering
• Sale and leaseback of 3
key buildings, including
TP’s head office
• 2 extra parcels of land
including in the
portfolio
• Bidders to propose sale
price and lease rates
10

11. Marketing
• Pre-marketing: market
soundings
• Selecting potential investors
• Teaser & NDA
• Procedure letter
• CIM
• Market research
• Structured Q&A
• Direct meetings
11

12. Risks to buyer
• Valuation: “buyer’s curse” in
auction situation
• Capex: cost estimates of
refurbishing buildings post TP
occupancy
• Lease period uncertainty:
lessor’s option to terminate
early or extend
• Market risk: takeup of new space
• Currency: PLN lease terms vs.
EUR financing
12

13. Non-binding bids
• 11 offers received
• Valuations within a fairly
narrow range
• Bidding strategies: high price /
high lease cost, low price / low
lease cost
• Some bidders excluded vacant
land plots
• 3 bidders selected for short
list
13

14. Evaluating bids
• Quantitative / objective
• Financial terms
• Markups to model agreements
• Flexibility for timing of new office
availability
• Qualitative
• Income statement impact
• Conditionality
• Financing
• Other caveats
• Bidder reputation and personal
dynamics
14

15. Result
BPT closes largest ever Polish sale and lease back
transaction
1 August 2008
After over six months of intensive project studies and negotiations, on Wednesday this week - 30th
of July, BPT entered into the final sale and lease back agreements with one of the largest European
communications companies, Telekomunikacja Polska S.A. - part of the France Telecom Group. On the
basis of the sale agreements BPT Optima Fund acquired in total approximately 62,000 sq. m. in the
Business Districts of Warsaw. The entire project consists of three top-located properties - two
landmark office towers included. The acquisition brought into the portfolio high quality and
conveniently equipped A-class office space supplied by nearly 500 parking spaces and a private
heliport. All three properties benefit from an easy access to the surrounding facilities such as public
transportation within a walking distance, shopping centre, banks, public institutions, hotels,
restaurants.
The total investment, close to 168 million EUR, is expected to provide the investors with a solid yield
much exceeding 7%.
15

16. Key themes
• Are parties close in terms of
valuation? This underpins the
viability of the deal.
• Does the buyer understand
the seller’s priorities and non-
financial criteria?
• Is overall market power on
the side of buyers or sellers?
• Differences between financial
investors and corporates
16

17. Aftermath
17

18. Aftermath
• Prime rental rates peaked at EUR32 sq.m
• Current rates represent a 22% decline
18

19. Aftermath
BPT Optima sells the Twarda Tower in Warsaw, Poland to Europa
Capital
3 September 2012
In an agreement signed on 30 August 2012 the BPT Optima real estate investment fund has sold its single largest asset, the
Twarda Tower in Warsaw, Poland, to London-based Europa Capital.
The tower was originally acquired in July 2008 as part of a large sale-and-lease back transaction with Telekomunikacja Polska S.A. (TP SA) - the
Polish telecom operator majority-owned by France Telecom. The original transaction included three office assets in the Polish capital. Although the
transaction price is not disclosed, with today's sale BPT Optima exits its single largest asset and with it also closes all liabilities associated with the
original transaction.
The approx. 27,000 sq. m. large Twarda Tower is located at the very heart of the Warsaw central business district.
"With the sale of the Twarda Tower, BPT Optima achieves an important milestone in the current restructuring process of the fund," says Fund
Manager, Antanas Anskaitis.
The other tower in the original portfolio, the Moniuszki Tower, was sold in December 2011 while the last of the three buildings, Obrzezna, located
in the Mokotow District of Warsaw, still remains with BPT Optima. The building houses the R&D organisation of TP SA, and this July the lease
agreement with this single tenant was prolonged until 2023.
19

20. Q&A
20