MEL ran into trouble when a year ago it bought back 52.3 million shares without seeking shareholder approval. Now CPI Capital Partners, a Citi-owned real estate fund, and Gazit Holdings, a Tel Aviv-based real estate company, have pledged €800 million to bail out MEL. However, some fear it might come at too high a price.

The CPI/Gazit investment comes in the form of a €300 million rights issue and a €500 million subordinated convertible bond. The rights issue will go out to MEL certificate holders at a price of €7, plus two additional warrants for every six newly issued certificates. On top of that, there are plans for another 30 million warrants for CPI/Gazit.

“Actually, we have had a lot of positive feedback from shareholders,” says Chaim Katzman, chairman of Gazit-Globe. “We’ve heard from many shareholders that they are pleased with the proposed direction and our plans for the company.  The share price has increased approximately 25% since the deal was announced, and that’s a good indicator of the market’s understanding and approval of this deal.  Quite a number of shareholders have expressed their support.”

MEL certificates, which last year traded as high as €21.35, now hover around the €8 level. Issuing new certificates, plus all the warrants, could have an extreme dilutive effect on the MEL’s book value per share (BVPS) and net-asset-value (NAV). Roman Herzog, analyst at Raiffeisen Centrobank in Vienna, estimates that the rights issue could dilute MEL’s BVPS from €10.70 to €11.73 from the current level of €14.76.

“It will be a huge dilutive effect,” says Herzog. “It will have a bad effect on the company in the short to medium term.” He is also concerned about the high coupon of 10.75% being paid on the planned seven-year convertible bond, which has a conversion price of €9.

“We believe that the Gazit/CPI proposal of: a)injecting cash into the company to be able to complete the development pipeline and take advantage of other market opportunities, b) the internalization of external management and the alignment of interest of existing shareholders with that of new management and the Investor, and c) the cleansing of capital structure through the cancellation of the partly paid shares and the shares that were purchase, allows current shareholders to become re-enthused about this company,” says Katzman.

Despite its problems, MEL’s portfolio is in good shape. “MEL’s portfolio is good. There have been some write-downs in Russia with a shopping centre but the portfolio is fine,” says Herzog. “The current concern is the convertible bond and the dilutive effect of the new shares.”

While analysts fret over the convertible bond and rights issue, CPI and Gazit are pushing ahead with their plans for MEL. They have announced the proposed appointment of Rachel Lavine as the new chief executive. Lavine, formerly executive vice-chairman of U Dori Engineering Works, has been working as a consultant to Gazit for the past three months. She will assume her new role once CPI/Gazit’s takeover of MEL is complete and her appointment is green-lighted by shareholders.

In a statement, CPI/Gazit said it expected to have this transaction completed during the second quarter. CPI/Gazit’s spokesman declined to comment on Lavine’s potential appointment or on shareholders’ concerns over the rights issue and convertible bond.