BRICKS & MORTAR: Orco and the killer sales

By bne IntelliNews June 22, 2009

Jiri Kominek in Prague -

The future prospects for Orco Property Group are going from bad to worse, with creditors circling the ruined edifice that was not so long ago one of Central and Eastern Europe's largest real estate developers.

On June 11, Orco revealed that its lost €390m in 2008, during which time its shares plummeted 92%. Unofficial, yet-to-be released figures indicate the company lost an additional €45.7m during the first quarter of this year. A stormy shareholder meeting is set for July 8.

In an effort to keep creditors at bay, Orco management filed for protection from creditors in Paris in April and began offloading some of the company's distressed assets for what minority shareholders claim is a song. These include the sales of the Origo project in Hungary for €5.7m and the Fehrbellinen development in Berlin for €5m. "At this point, we do not know what price Orco paid for these assets since the current management refuses to disclose details and, therefore, we have no way of knowing whether their sale will generate adequate revenues to satisfy creditors," Lubos Smrcka, head of SOS Orco, an association of minority shareholders, tells bne while in Dublin, where he was negotiating with other minority shareholders about a possible takeover of the firm.

Smrcka echoes the concerns of many observers who fear that Orco's current management team headed by Jean-Francois Ott purchased many of its property holdings between 2005 and 2007 on credit when real estate prices were outrageously over-inflated. When the bubble burst, followed by the subsequent credit crunch, Orco found itself overleveraged in excess of €1.6bn and holding property that's value is a fraction of what it was. "We are convinced that the current management team must be changed, and quickly, before the company ends in bankruptcy," Smrcka says.

Woolf in sheep's clothing

The stage is now set for an AGM on July 8, at which the company's current management headed by Jean-Francois Ott will find itself pitted against

SOS Orco, which claims to control 14% in the developer. SOS Orco is attempting to rally other minority investors including Czech property investment group Prosperita as well as foreign investors into gaining power of attorney over the firm, which would enable them to replace the current management by June 22 when the latter's exclusive mandate to negotiate with potential white knight US property group Colony Capital to provide a €167m fund injection expires. Colony Capital is currently conducting due diligence on Orco's property assets. "We do not intend to give up even if negotiations [with Colony Capital] collapse - we will look for a new strategic partner," Orco Property Group spokeswoman Petra Zdenkova told Czech financial daily Hospodarske noviny on June 12.

Smrcka insists he isn't seeking to become the next head of Orco. "I can think of a number of individuals who have the necessary international experience in managing companies of this size who are much more qualified," he says.

One of those is clearly the UK property investor of Czech descent James Woolf of Flow Management, which SOS Orco has teamed with. Known to his colleagues as "Jimmy the Knife" for his cutthroat business approach, Woolf has been a predator in Prague's murky real estate scene since the early 1990s and owns a number of properties in the city including the famed Yalta hotel on Wenceslas Square. Woolf rose to prominence during the 1990s when, surrounded by former SAS bodyguards, he fought to gain control over Prague's Kotva department store in a widely contested legal dispute. SOS Orco have also informed local media of plans to nominate Igor Kocmanek, former head of Raiffeisen Capital & Investment Prague.

Analysts differ in their predictions for how Orco's predicament will evolve. "Should the company succeed in convincing Colony Capital to provide the €167m cash injection, this should be enough to keep creditors happy and allow Orco to dump assets and restructure," Karel Potmesil, property analyst at Cyrrus, reckons.

Other analysts, however, are less optimistic and share the fears of Orco's minority shareholders who believe the property group's creditors, which are said to exceed 52 banks, won't be satisfied with financial assistance from Colony Capital. "At this point, Orco needs either a substantial infusion of capital from a strategic investor or negotiate a debt-for-equity swap with existing creditors," says Jiri Fiser, an analyst at Czech investment bank Patria/KBC.

Fiser argues that the €167m being sought by Orco from Colony Capital won't be enough to keep the company afloat for more than six months. "In our estimation, Orco will require approximately €300m-400m in order to survive its current problems and will need to ditch distressed assets as well as restructure its portfolio. Given this, the €167m from Colony Capital, if secured, will merely be a band-aid solution that will have a temporary effect at best," he says.

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