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Orion’s Veterans Have Form When It Comes To Bets Like Its Stake In Intu

Intu Derby

Orion Capital Managers is one of the best-regarded opportunity fund managers in European property. And it has made one of the most interesting bets so far on the fate of UK retail property.

Orion has built up a 9.2% stake in Intu, the listed shopping centre REIT which has seen two takeover bidders walk away from it in the past 18 months, and is selling assets to reduce its leverage.

Intu’s shares currently trade at 86p, meaning Orion’s stake is valued at about £106M. That is less than what it paid for the shares. Shareholders have to make public their holdings in a listed company when they own more than 3%. For Orion, that occurred on 29 January, when the shares were trading at 112p — the value of some of its holding has dropped by 23% since. Intu’s shares have fallen by almost two-thirds in the past year.

Intu is trading at a discount of 69% to the net value of its assets, by far the widest discount in the UK, as stock market investors bet that the value of its shopping centres will fall much further.

But in buying shares in the company, Orion is betting Intu is undervalued by the public market and the price of the shares will go up.

Of course, only time will tell if Orion is right. Evidence that the shares are undervalued comes in the form of the last major sale undertaken by Intu: It sold a 50% stake in its Derby shopping centre to Cale Street in April for £186M, a price in line with the centre’s December valuation. That shows investors are willing to pay a price closer in value for the company’s assets than the discount to NAV would indicate.

If that thesis holds up, over time the shares should rise and the gap to NAV narrow, or someone will come in and take the company private for a price higher than the company’s current share price. Brookfield walked away from a 210p-a-share deal, below the company’s last NAV of 271p a share, but almost double the price at which Orion bought most of its shares.

Orion, run by industry veterans Van Stults, Aref Lahham and Bruce Bossum, is one of the largest current investors in UK regional shopping malls. And it has experience when it comes to investing in public companies at a time of peak distress and profiting from their revival.

In 2009 it bought into the debt of Spanish company Colonial alongside Colony Capital, when the company’s assets were valued at less than the level of its loans. It ultimately exited the stake at a profit when the Spanish market recovered.

In that case, Orion’s downside was limited due to the fact that it had bought debt, not shares, in Colonial, but that also meant its upside was capped. In the case of Intu it is the other way around: Its upside is unlimited if the shares rise in value, but they could also drop to zero.

It is one of the largest and most public bets so far by an opportunity fund that the market is too pessimistic about the prospects for UK retail.