Institutions may keep Canary Wharf stake

Canary Wharf shareholders will have the chance to retain a stake in the London Docklands property company after it is taken private under proposals put forward by the favoured bidder Morgan Stanley.

The £1.5bn offer, if it is formalised, will be 220p cash plus 35p worth of shares in the takeover vehicle. The idea is to keep the big institutional investors on side and parry any criticism that the terms are lower than expected by offering them a stake in any future success at Canary Wharf.

Two potential bidders ­ the Morgan Stanley consortium and Canadian property group Brascan ­ submitted proposals by last Wednesday's deadline set by the independent directors of Canary Wharf. Although all parties involved, including the chairman, Paul Reichmann, are playing their cards close to their chests, it is believed that the board of Canary Wharf entered exclusive talks with Morgan Stanley after Brascan offered more cash but fell short of Morgan's total package.

Goldman Sachs, meanwhile, is believed to have pulled out of the consortium put together by Morgan Stanley, although it could still emerge as an investor in the takeover vehicle.

A source in the Morgan camp said: "There has been a lot of publicity about institutions being unhappy that companies have been taken private on the cheap. This is a way for investors to share in the potential for upside."

Existing shareholders will retain 28 per cent ownership in what is claimed to be the first deal of its kind. But the 255p-a-share value of the proposal is way below market hopes of a cash bid topping 300p.

The part-paper option was regarded as attractive by Canary Wharf's independent directors. A spokesman said: "A lot of deals have left institutions resentful. They sell out and a year later the company pops up again valued at a lot more. Private equity funds always say that they are looking for a high rate of return. This gives shareholders access to this kind of investment for the first time."

Morgan and its main partner Simon Glick, who owns a 14 per cent stake in Canary Wharf, are still putting their proposal together but they are likely to come up with a formal offer next week. The investment bank was involved in putting the Canary Wharf into receivership in the 1990s and leading the IPO when it came back to the market.

Brascan, a shareholder with a 9 per cent stake, declined yesterday to give any indication of whether it would attempt to put its proposal directly to shareholders or return with a higher offer. Mr Reichmann is another unknown quantity. He holds 7.7 per cent of the company and earlier this year indicated that he would put together a bid himself if a sufficiently high offer was not forthcoming.

Shares in Canary Wharf closed up 5.75p at 240p.