One of the things that has surprised me in the past couple of years is the ease with which bidders have been able to get control of investment companies they have targeted. Often boards have given the impression of taking the first deal put on the table rather than fighting for better terms.

The classic example of this was the success of the bid for Civitas Social Housing (CSH) in June last year at a 27% discount to net asset value (NAV). At the time, I could not understand how, in all consciousness, its board could recommend that deal to its shareholders.

Now, we have something of a repeat of that situation.

Abrdn Property Income (API ) is too small with a market value of just over £200m and it trades on too wide a discount at about 36%. While its five-year returns are the best in its sector and its one-year NAV return is second only to AEW UK Reit (AEWU ), the low share price rating shows it is not being given the credit for this good performance.

A larger, but worse-performing company in its sector, Custodian Property Income (CREI ) bid for API on 19 January, offering 0.78 of its shares for every API share and no cash option. The API board was unanimous in recommending the bid and it has since reiterated this stance.

Under the terms of the deal, two of API’s directors get to join the CREI board. There are also various sweeteners for CREI shareholders including a fee reduction, which shareholders should probably request happens regardless of the success of the bid.

CREI shareholders have voted in favour of the deal, which is unsurprising as on a NAV basis the terms represent a transfer of value to them from API investors.

However, CREI’s share price dived after the bid was announced and the API board has not sought improved terms. As things stand, based on a CREI share price of 70.5p yesterday afternoon, the bid values API on a 34.3% discount to NAV.

Urban Logistics (SHED ) joined the fray on 16 February. It was prepared to offer 0.469 SHED shares for every API. With its share price at about 117p, its bid would have offered worse terms than CREI, but this is academic now as following its rejection by the board last week, SHED has decided not to proceed with an offer.

There is a third alternative on the table. The API board has stated that if shareholders reject the CREI offer it would prefer to pursue a managed wind-down rather than soldier on. Of course, that decision rests with shareholders not the board. However, the API board has been firm in its view that this isn’t the best option for shareholders – it wants them to accept the CREI bid.

API neatly illustrated the potential for a managed wind-down when it announced on 20 March 2024 that it had sold two assets for £16.6m, equivalent to a 0.3% discount to NAV. If it could repeat this across the rest of the portfolio, shareholders would be more than 50% better off than they would be taking the CREI offer.

In an announcement on 14 March, the board said a managed wind-down was more viable now than when it had first considered it, but a week later, on 21 March, it clarified that the value achieved in a gradual disposal of assets would be ‘lower than those achievable on carefully selected individual assets marketed by API in the ordinary course of business.’

I am struggling with the logic of this. You would have to take an awfully big hit to NAV on disposals to achieve a worse result than the CREI offer. Given how far the attractions of the CREI offer have diminished since it was first announced, it is hard to fathom why the board are so dogmatic about defending it. Especially when UK inflation numbers are finally improving, bringing with them the hope of lower rates and improved property prices.

I would also point out that, as evidenced by the performance I referred to earlier, the existing API team has proved its worth. I am sad that, whatever the outcome of this, we look set to lose access to the expertise of fund managers Jason Baggaley and Mark Blyth at some point, either in the short term if the bid goes ahead, or in about two years’ time when the portfolio is wound down.

As things stand, however, it clearly makes sense to reject the CREI offer and let the API team maximise your exit price.

James Carthew is head of research at QuotedData.

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