Polygon Global Partners LLP

4 Sloane Terrace
London SW1X 9DQ
United Kingdom

T +44 20 7901 8300

F +44 20 7901 8301
www.polygoninv.com

Mr. ngel Benito Benito

Director General de Mercados
COMISIN NACIONAL DEL MERCADO DE VALORES
C/ Edison 4
28006 Madrid
By registered mail
10 March 2016
Dear Sirs:
Ref.: Realia Business, S.A. (Realia)
Following our letters to the Comisin Nacional del Mercado de Valores (CNMV) of
15 January 2016 and 15 February 2016 relating to the takeover bid launched by
Inmobiliaria Carso S.A. de C.V. (Carso) over Realia, we have become aware that the
prospectus filed by Carso was admitted by the CNMV on 3 March 2016.
Further, we note that on 4 March 2016, Carso separately launched a takeover bid for
Fomento de Construcciones y Contratas, S.A. (FCC), Realias largest shareholder.
The CNMV, in fulfilling its responsibility for approving the takeover bid by Carso over
Realia pursuant to the Royal Decree 1066/2007, of 27 July, on the regime governing
takeover bids (Real Decreto sobre el rgimen de las ofertas pblicas de adquisicin de valores) (the
Decree), should consider the following facts and circumstances which we believe are
essential to understanding the proper valuation of the proposed transaction.
1.

Postponement of the capitalization of the loan acquired from the SAREB; breach
of neutrality duties by the members of the Board of Directors of Realia.

In the Significant Event (Hecho Relevante) No. 233559 dated 29 December 2015, Realia
announced the following:
Inversora Carso, S.A. de C.V. has conveyed to the Company on the date hereof its decision to
exercise on 15 February 2016 its right to capitalize the tranche of its shareholder loan in the
amount of EUR 29 million. Consequently, according to the resolutions passed by the last
General Shareholders Meeting, it will subscribe for 14,077,669 shares, at a unit cost of EUR
2.06 per share.

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On 28 January 2016, Carso launched its takeover bid over Realia. On 15 February 2016,
two weeks later and only six weeks after announcing Carsos decision to capitalize its
shareholder loan, Realia made a further announcement in the Significant Event No.
234192, as follows:
REALIA hereby announces that on the date hereof, REALIA and Inversora Carso, S.A. de
C.V. reached an amendment agreement of the participating loan existing between both parties in
order to adjust, among other features, the maturity date and the early termination date to the
duration of the syndicated financing of REALIA. As a result, REALIA and Inversora
Carso, S.A. de C.V. also agreed to open a new capitalization option/window on 3 May 2016.
Should Inversora Carso, S.A. de C.V. decide to Voluntarily Capitalize, it shall disclose it at
least five days in advance. Consequently, the capitalization announced in the significant event
No. 233559 dated 15 February 2016 will no longer have effect.
This reversal is striking for several reasons:

We believe that Carso concluded that it would be very difficult indeed

untenable for it to justify as fair a price of EUR 0.80 per share of Realia
offered in the takeover bid if, at essentially the same time, it was exercising its
right to subscribe for 14,077,669 Realia shares at a price of EUR 2.06 per share
a price 158% higher. As such, it sought to reverse the transaction.

We can see no business rationale from Realias perspective supporting the

postponement of the capitalization; to the contrary, Realias interest should be to
capitalize as soon as possible. Carsos explanation for the reversal set forth in its
statement of 26 February 2016 explained little and strikes us as excusatio non petita,
accusatio manifesta:
On 15 February 2015, Realia and the Offeror entered into an amendment agreement to the
Loan (the Amendment of the Loan ) which modified, among other matters, the maturity
date and the early termination date of the Loan in order to adjust such dates to the new terms of
the syndicated financing of Realia ant to the early repayments of 29 January 2016. Such
Amendment of the Loan is carried out within the debt restructuring of Realia so that IC and
Realia can study the different capitalization options and the reduction of Realias indebtedness.
As a result of the Amendment of the Loan, the parties waived the communication from IC to
Realia stating its intention to exercise its right to capitalize the Voluntary Capitalizable
Trench and scheduled a new capitalization deadline for 3 May 2016, which may beexecuted,
as the case may be, by IC with prior notice given to Realia at least five days in advance.

Following the launch of Carsos takeover bid, the Board of Directors of Realia is
required to comply with article 134 of the Consolidated Text of the Spanish
Securities Market Act (related to article 28 of the Decree) and therefore has a duty
of neutrality. Realias agreement, made by its Board of Directors, to enter into
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the Amendment of the Loan, in impacting the companys share capital, went
beyond management in the ordinary course of business activities and, in our
view, is a clear breach by the members of Board of Directors of their neutrality
duties and a serious infringement of article 280.2 of the Consolidated Text of
the Spanish Securities Market Act. Given the obvious conflict of interest and in
accordance with article 228, c) of the Spanish Companies Act, each of the
members of the Realia Board of Directors appointed by either Carso or FCC
should have abstained. This serious breach of corporate governance should be
investigated by the CNMV given the potential harm to investors.
2.

Carsos takeover bid for FCC and its implications.

The 4 March 2016 takeover bid launched by Carso for the outstanding shares of FCC is a
mandatory bid and follows (i) from Carso exceeding the 30% threshold on the closing
of FCCs rights issue and (ii) also from the scope of the agreements between Carso and
Nueva Samede 2016, S.L., a vehicle controlled by Ms. Esther Koplowitz Romero de
Juseu.
First, we note what we see as the complete lack of credibility and rigor of the arguments
made by Carso to the CNMV in its exemption request of 8 January 2016. We reject the
proposition that FCC is a fully-independent company, which takes its decisions in an
autonomous way and irrespective of Carso/Grupo Slims decisions. Irrespective of the
legal status of joint control with Ms. Esther Koplowitz Romero de Juseu, in reality
FCC is effectively controlled by Carso: it was financing the companies controlled by Ms.
Esther Koplowitz Romero de Juseu and running the negotiations with their creditor
banks.
Second, in accordance with article 7.1 of the Decree, once the takeover bid for FCC has
been completed, Carso will have three months to register a takeover bid for Realia to
which the fair price provisions of article 9 of the Decree would be applicable. We
believe the CNMV should clarify whether this means there is going to be a second
takeover (or whether the obligation is going to be consolidated by the ongoing
takeover) and, if so, whether a different price will apply. The CNMV should oblige
Carso to launch a compulsory takeover bid on Realia at a fair price.
Third, FCCs shareholding in Realia of 36.91% should now be attributable to Carso,
which means it will have a combined shareholding of 67.21%.
Fourth, from a corporate governance standpoint, any pretense of independence of the
directors appointed by FCC or Carso can reasonably be called into question, as noted
above. All of the members of the Board of Directors appointed at Carso and FCC have
a clear conflict of interest, which they have a requirement to disclose and which would
require them to abstain from votes on relevant corporate actions.

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3.

Valuation and fair price.

The price of EUR 0.80 per share offered by Carso is far from being a fair price due to
the following reasons:

The value of the NAV (valor liquidativo de la compaa) published by Realia is 75%
higher than the price offered by Carso, once the NAV has been adjusted for the
haircut of the debt achieved in 2016 and for the conversion of the participating
loans that has been delayed until May 2016.
Taking as a reference the calculations made by the company itself, the
adjustments due to the fair value of the company would be as follows:
Million Euros
Consolidated equity attributable to the parent company
Adjustments
Adjusted equity attributable to the parent
company
Number of shares (treasury shares aside)
NNAV per share disclosed December 2015 (Euros)
Release after debt refinancing in 2016
Adjusted equity attributable to the parent company
due to the release
Number of shares (treasury shares aside)
NNAV per share after the release (Euros)
Swap of Carsos shareholder loan May 2016
Equity after events known in 2016
Number of shares after the swap of the shareholder loan
Actual NNAV per share after the swap of the shareholder loan
(Euros)

514.2
37.7
551.9
460.1
1.20
72.4
624.3
460.1
1.36
61.3
685.6
490.1
1.40

The value published for Realias assets seems overly conservative in the light of
the values that comparable companies have published for the Spanish market in
2015.
The valuation published by Realia of its high-quality rental assets shows an overall
appreciation of only 3.2% in 2015, compared to what companies like Colonial
and Merlin, also in the office sector, have published for 2015 (+16% and +10%
increase in values respectively).
We therefore believe that Realia is
underestimating the increase in value of the assets in 2015.

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If we were to apply to Realias assets the same appreciation in 2015 as the one
achieved by Colonial, the NAV per share would reach a level of EUR 1.78 per
share.

Realia has 38.7% of its office rentals and 21.4% of its shopping centre rentals, so
overall 33% of its rents, coming up for renewal in 2016. Those rents were
previously set in years when the Spanish economy was in a materially worse
condition than it is currently. Those rents are likely to be increased significantly
in the year to come, which would significantly increase the value of these assets
when appraised during 2016.
The extract from Realias annual report disclosed in early March 2016 showing
the cadence of the rent renewals in their portfolio is the following:

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As we can see from comparable companies in the office sector like Colonial,
rentals in the core markets of Madrid and Barcelona are increasing significantly
once the contracts are renewed.
For example, the latest extract from Colonial in 2015, which shows the
development like-for-like of its rentals, is as follows:

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Comparable companies in the Spanish market trade at a premium to NAV,

reflecting the expectation for higher rents in the market. We show Colonial and
Merlin again, as they are the companies that most closely resemble the high
weight of high quality assets in the portfolio that Realia has:
Euros
Colonial
Merlin

NNAV
2015
0.62
9.23

Trading price 4
March 2016
0.65
9.85

Premium/(discount)
4.7%
6.8%

On 4 March 2016, Foncire de Paris (the French office real estate company)
received a bid from a competitor, Eurosic, at a value of EUR 145 per share. That
value is a 7.6% premium to the NAV of EUR 134.72 that the company has
published at the end of 2015. This is another example of how valuations work in
this sector, and in a market like France where the economic growth and prospects
are weaker than those of Spain. The NAV, as the liquidation value of the
company, should indeed be the absolute minimum that a bidder for the company
should need to offer to the shareholders for control.

For the reasons set forth above, we cannot accept that a price of anything less than that
NAV of the company (adjusted for the already effective haircuts of the debt and
conversion of participating loans) could be considered precio equitativo. Comparable
companies are trading at a premium over such values; worse, the offeror itself is going to
convert a loan into common stock at a price of EUR 2.06 per share. The offer deeply
undervalues the current value of the assets, even without considering the very strong
potential for rental growth of the assets starting with the renegotiations coming in 2016
and beyond.
We remain at your disposal to provide any clarifications that you may require, as well as
to discuss the matters included in this letter.
Sincerely,
Polygon Global Partners LLP

By: ________________________________
Nicolas Dautigny
cc:

Alejandro Fernndez de Araoz Araoz y Rueda Abogados

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