Will the Lowy family and its Westfield Group blink and be forced the change the terms of its proposed separation?
Such a move could be on the cards as talk persists that the big Westfield shopping mall reshuffle is in trouble with major investors upset at the valuations attached to Westfield Retail Trust (WRT), which will be renamed Scentre Group.
The performance of units in Westfield Group and the retail Trust in yesterday’s sharp sell off suggests that something is about to happen.
Units in Westfield Group (WDC) fell 2.66% yesterday, losing 27c to $9.85, the lowest they have been for 18 months. But units in the Retail Trust rose 3.2% or 9 cents to $2.91.
Yesterday’s price movements in both companies stood out for their unusualness on a day when the wider market was very weak, as it has been for most of the time since the split was announced at the start of this month.
The rise in the value of the Retail Trust’s units was very odd, given it is widely seen as the loser in the Westfield split, with higher gearing and less attractive growth prospects. And yet the units rose, for no apparent reason.
Equally, the Westfield Group units fall was very odd given the relative strength they have shown to Retail Trust’s units. Yesterday’s performance seemed to be suggesting that something is about to happen in the deal that will improve the position of the Retail Trust, possibly at the expense of Westfield Group.
Yesterday’s moves also stood out given the weak performance of the Lowy companies this year so far. From a high of more than $12 a unit mid year, the price of Group units has sunk to a low in October of less than $10.20, and then rose, but then dropped yesterday to the 18 month low.
It is a similar story with the Retail Trust – its units peaked above $3.40 in May and have been on a slow slide ever since. They bottomed out under $2.90 a unit in early September and are back at this level again.
WDC Vs WRT YTD – A reshaped deal coming from Westfield to convince investors about the split?
At the same time there are growing questions about the gearing and leverage associated with the other part of the split, Westfield Corporation.
Big fund manager shareholders are objecting to the non-disclosure so far of the cost to the Retail Trust of internalising the management rights – some estimates claim these could be as high as $1.8 billion, all of which ends up in the international side of the reshuffle – Westfield Corp.
The reshuffle is the third such major development in the past decade for the Lowy family’s retailing mall empire – in 2004 three separate companies, including the US trust, were merged, in 2010, the Retail Trust was spun off (actually 50% was given to shareholders).
Now there’s the latest complete split in the empire between Australasia and offshore, with the Lowy family sending signals they will be more interested in the offshore business. Analysts take as evidence of this the 18 months Peter Lowy is expected to spend on the Scentre board after the deal is done.
As well, the Lowys sold most of their 7%-8% stake in the Retail Trust earlier this year for more than $600 million.
That sends a message that Australia is no longer an interesting area for the Westfield core company and the Lowy family.
That’s understandable given the company has grown to about where it can’t really expand much more, except through small revamps at its existing shopping malls.
Analysts not only worry about the cost of the internalisation of management for the Retail Trust, but have also indicated they are worried about the future gearing levels of the Trust will be too high for comfort and will require the sale of partial stakes in some malls.
That in turn will lower net asset backing and dilute the quality of the trusts property portfolio.
Westfield Corporation is also generating fears about its gearing level and that was a major reason why Standard & Poor’s put Westfield Group on a credit waatch negative outlook, which indicates a downgrade is very possible.
”We expect that the proposed demerger would enhance WRT’s competitive position. The size and scale of the portfolio would improve with an exposure to high-quality shopping centre assets,” Standard & Poor’s analyst Graeme Ferguson was quoted in media reports earlier this month.
”However, we expect that Westfield Corporation’s competitive position could come under pressure due to weakened asset quality and a heightened exposure to asset redevelopment. In addition, the new group would no longer receive high-quality income from the Australian and New Zealand assets.”
Earlier Moody’s made the same move on Westfield’s rating and a senior executive was quoted as saying; ”If the restructure proceeds, as planned, Westfield’s credit profile would be weaker as a result of the lower asset quality, narrower asset base, and diversity. Furthermore, the new Westfield Group is likely to exhibit higher earnings volatility from developments as a result of the number of large development projects outside Australia."
These are serious concerns and would reduce the attractiveness of Westfield (and its two planned bits) to conservative investors such as big insurers and pension funds which need a certain level of credit rating to justify their investments.
The misgivings from the two ratings group can’t have helped confidence among investors.
Under the split, WRT investors are being offered $285 and 918 securities in the new Scentre Group for every 1,000 WRT securities held.
The proposal is subject to approval by 75% of Westfield and WRT security holders at meetings expected to be held next May.
It also remains subject to a number of conditions, including court and regulatory approvals as well as debt financing and restructuring of contractual arrangements.
John Kim, at investment bank, CLSA, told Fairfax Media this week that the proposed transaction was an admission by the Westfield Group that the WRT experiment has been a ”disappointment”, given the huge transaction costs involved and WRT’s discount to net tangible assets since listing in December 2010.
”Another negative from the transaction is that pro-forma gearing in the new Scentre will be 38.2 per cent, considerably higher than WRT’s 21.5 per cent, with S&P putting WRT’s A+ credit rating on CreditWatch negative.
”We appreciate that the new group will have a significantly higher asset base of $28.5 billion compared to WRT’s $13.7 billion, with active earnings from management income, nevertheless it is still a material increase in gearing.”
While the Australian malls supported Westfield in 2008 – 10 as US and UK sales tanked in the recessions, retail sales growth in both of those markets has done better than in Australia over the past year or so.
It seems Westfield thinks that has not been recognised by investors in Australia, hence the split with the new offshore business holding those US and UK malls, plus development and investment sites in economies such as Brazil and Italy.
And a final factor is the suggestion that Westfield Corp will end up heading offshore, leaving the Retail Trust (Scentre Group) behind. Westfield plans to spend the next 18 months investigating the best domicile for listing. America looms large.
A day after revealing plans to restructure and split the Lowy empire, Westfield Group has revealed where the future direction of the empire is going to be with the $US800 million purchase of the remaining 50% in the World Trade Centre retail assets in New York. Time to follow the money, again?
