A merger would enable the combined companies to convert to a REIT next year. On their own the two firms would struggle to convert because GPE has too high an exposure to development to meet trust rules, and LMS, which is controlled by the family of chief executive Robbert Rayne, would likely breach the shareholding rule, which says that no single investor can own more than 10% of a REIT's shares. The Rayne family controls 40% of LMS. Analysts believe a merger between the two makes sense because both companies specialize in Central London property and need to build portfolios dramatically ahead of REIT conversion.
LMS, which is advised by NM Rothschild, has about euro 370.44 million ($471.9 million) of development projects under way and a further euro 1.5 billion ($1.9 billion) of projects in the pipeline. The firm recently spun off its private equity arm, Leo Capital, leaving it focused solely on property.
In the case of GPE, Morgan Stanley is likely to be key to the outcome of any merger talks. It has a 25% stake in the company.
Both companies are attractive to investors because of their focus on London property development where the market is especially buoyant. Investors are looking for development exposure because completed buildings are selling at prices that reflect yields of 4% in the prime areas of the West End. Shares in LMS currently value the company at euro 1.3 billion ($1.7 billion) while GPE is valued at euro 1.5 billion ($1.9 billion).
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