On December 2nd Australian shopping center company the Westfield Group, led by Frank Lowy, announced an ambitious plan to restructure the group’s property holdings as Jewish Business News reported here:
An existing domestic Australian retail real estate investment trust, or retail REIT, the Westfield Realty Trust, which Lowy had spun off a few years earlier to hold some of their mature properties, would now take on all of Westfield’s existing domestic Australian and New Zealand properties and form a giant company in its own right with independent management, board and shareholding. These would include the majority of the top shopping centers in Australia.
This would then leave the rest of Westfield group to continue to develop its increasingly important foreign assets, such as the new World Trade Center retail complex in New York and core super-regional shopping centers in the UK and Europe as well. In other words, to become a “pure play” development company.
World Trad Center shopping mall
If the proposed transaction is completed as planned, total assets of the newly enlarged Westfield Trust will be over US$25 billion on day one, comprising interests in 47 shopping centers. The portfolio will also include 15 of the top 20 shopping centers in Australia, and have a future development pipeline of about US$1 billion initially.
While perhaps sound in principle the devil, as always, is in the details and there has been a good deal of institutional shareholder rumbling in Australia saying the deal as presently structured is unfair, as the relative values for the exchange of assets between the two companies is not well thought out.
In addition, shareholders of the intended new REIT are apparently worried that Frank Lowy could later abandon them completely, as he is only committing personally to sit on the board of the new REIT not to be there for ever.
The institutional discontent first came to the surface a month ago, which Jewish Business New reported on January 18th here:
Now the authoritative Australian business magazine, the Australian Financial Review, reports that shareholder unrest relating to the US$25 billion transaction is reaching a crescendo.
When it was first analyzed criticism focused on the comparatively high P/E ratio being applied to Westfield Group assets to be transferred to the REIT. That was an indirect way of saying they were simply over-valued, to the ultimate benefit of Frank Lowy and his own shareholders, and at the expense therefore of the shareholders of the retail REIT itself.
Now some actual valuations have been looked at, it seems, which, though putting the point differently, seem to come to a similar conclusion. These would then imply a significant net asset value dilution for the existing REIT shareholders.
Clearly at the very minimum some urgent PR needs to be done here by Frank Lowy and his board, as there is nothing intrinsically wrong with the idea that the long term growth potential of the properties transferred may be superior to existing assets of the trust, for example.
Frank Lowy / Getty
Beyond that, if he is not very convincing there, then the relative prices for the exchange may need to be altered to get the deal done.
According to the AFR, one fund manager with a big stake in both entities argued the deal would be defeated if it was voted upon today, insisting “they don’t have the numbers”.
The investor, along with several other shareholder holders, is hoping to get a reduction of close to $1 billion off of the cost of the platform.
Playing hardball is lots of fun; however, once the trauma of realizing the Retail REIT is about to leave the Frank Lowy mother-ship, and grow up as an independent company, sinks in further, its countervailing advantages may become more obvious.
For Jewish Business News we will certainly report the outcome, however it should all turn out.