Legal & General investors unhappy with £1.2bn Cala Homes sale

Legal & General Group (LSE:LGEN) shareholders felt more frustration today after a key deal under the new strategy of chief executive António Simões was given a cool response in the City.

The shares fell 5.8p to 222.6p as it emerged that more than half the proceeds from the £1.1 billion sale of UK housebuilder CALA Group will be realised over a period of five years.

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The apparent disappointment over the terms of the deal agreed with Sixth Street Partners and Patron Capital, which has an enterprise value of £1.35 billion, continues the lacklustre run for shares since Simões set out his strategy in June.

Alongside his vision for a “growing, simpler, better-connected L&G”, Simoes pledged £200 million a year of share buybacks and 2% dividend growth starting from next year.

He told the City this would equate to more than L&G’s previous policy of 5% dividend growth under predecessor Nigel Wilson, who spurned buybacks in favour of investment.

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The company, whose 9% yield makes it a popular stock among FTSE 100 income investors, is due to pay an interim dividend of 6p a share on 27 September.

The more disciplined approach to capital allocation under Simões meant CALA and some other assets were recently put into a new Corporate Investments Unit, with the goal of maximising shareholder value ahead of potential divestment.

L&G said today that the CALA proceeds will primarily be used to reinvest in the group, which is focused on institutional retirement, asset management and retail savings and protection. It will also consider increasing shareholder returns through ongoing buybacks.

The sale reduces L&G’s Solvency Capital Requirement by about £100 million, which analysts at Jefferies reckon lifts the company’s Solvency II ratio by three percentage points. The figure stood at 223% in August’s half-year results.

Highlighting the deferred proceeds and the limited near-term upside to special capital returns, the City bank this morning predicted a muted share price response to the deal.

The level of expectation attached to the CALA disposal is in sharp contrast to 2013, when the company spent a modest £70 million buying half the housebuilder.

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It was the first deal for a new Legal & General Capital division, which was set up following the financial crisis and had the aim of investing directly in companies and assets in under-funded sectors of the economy.

CALA started as the City of Aberdeen Land Association in 1875 and was the first Scottish company listed on the London Stock Exchange.

Since L&G’s first involvement in 2013, revenues and profits have grown by five and ten-fold to £1.3 billion and £112 million respectively. It has tripled the number of homes built each year to 2,917, with the focus on the south of England, Cotswolds and Scotland.

L&G took full ownership of CALA in 2018, when it bought out one of today’s parties — Patron Capital — in a deal that valued the business at £605 million.