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The massive corporate restructuring at Frank Lowy’s two Australian listed retail-oriented real estate companies, the Westfield Group, and the Westfield Retail Trust, is now getting closer to fruition, with shareholder meetings to ratify the deal now planned for May 29th, 2014.
Late last year the Australian stock exchange listed Westfield Group, which these days is primarily an internationally oriented development company, announced a plan whereby all their existing domestic Australian and New Zealand mature shopping centre assets would be spun out to the existing, and separately listed, Westfield Retail Trust, which already has 50% interests in many of them.
The new entity is to be called Scentre Group, pun fully intended, it will become internally independently managed, and will continue to be a major company in its own right, but one which primarily will be operating in the much more mature domestic part of Westfield’s business.
Scentre Group will have its own domestic development functions too, and inherit the Westfield Group’s existing domestic development management team and projects, but these will be on a relatively small scale compared to the rest of Westfield’s international operations which, these days, have increasingly become the core of the Westfield Group’s activity.
As part of the spin out, Westfield have proposed the Retail Trust also takes over its own management functions from Westfield Group, and that it pay Westfield Group about US$1.7 billion (A$1.9 billion) for the privilege, with of course the longer term pay back of no longer paying annual management fees to them. Most of the existing associated property management team will also transfer over to the new Scentre Group to ensure continuity.
After the reorganization the Westfield Group will then change its name as well, calling itself henceforth simply the Westfield Corporation, and continue as an international development “pure-play” for its investors, with massive new retail property developments completed, under way or planned, in the United States, in Europe and elsewhere.
When ever you do a spin-off of this kind the details matter, both as to the relative price one entity implicitly pays for the assets it is receiving compared to the entity giving them up. Also, as to the price Sceptre should “pay” Westfield Group for taking on its own internal management and impose an ongoing annual revenue loss for Westfield which hitherto charged fees for the privilege of managing the Retail Trust.
The net result expresses itself in the ratio of shares in the newly enlarged entity given to the different parties, and in the net debt each of the two companies ends up taking on its own balance sheet.
Accordingly, to ensure fairness even the Australian Securities authorities has been said to be studying the merits of the proposed transaction, and a number of Australian institutional shareholders, especially those invested in the existing Westfield Retail Trust have already for some time been complaining vociferously about the terms.
Frank Lowy is no stranger to controversy and he is charging ahead however on the terms originally proposed, however, and both the Westfield Group and the Westfield Retail Trust have each just issued a large prospectus to their shareholders, several hundred pages long, describing and defending the terms of the proposed reorganization in great detail. They are impressive documents. Lowy has also set May 29th, 2014 as the date for shareholders to formally approve the transaction and the companies have issued proxy forms for shareholders on their web site, to submit their votes either on-line or by mail, in the mean time.
Under the terms of the reorganization, existing Westfield Group shareholders will be given 48.6% of the shares of the newly enlarged entity, the Scentre Group, essentially reflecting the value of all the domestic Australian and New Zealand properties to be transferred into it, and existing shareholders of the Westfield Retail Trust will get to keep 51.4% of the enlarged entity.
Key to the proposals are two new independent expert fairness opinions included in these prospectuses, one issued by Grant Samuel & Associates on behalf of shareholders of the Westfield Group and one issued by KPMG on behalf of the Westfield Retail Trust shareholders.
According to Grant Samuel the appropriate ownership range for existing shareholders of Westfield Group that would represent a reasonable and fair valuation for their contribution to the new entity is between 48% and 56%, thereby endorsing the deal even though, at 48.6%, it is at the low side of their range.
According to KPMG the range that in their opinion is reasonable and fair, for shareholders of Westfield Retail Trust itself to retain in the new Scentre Group, is between 51.3% and 51.8%, and again therefore acceptable as under the plan they will be keeping 51.4%.
KPMG also indicated the proposal had key similarities to a “merger of equals” with compelling benefits, including improved corporate governance structure, removal of potential conflict of interests and consigning existing related party agreements and fee obligations between Westfield Group and Westfield Retail Trust to the dustbin. In its view, offsetting additional risks, including a higher degree of financial leverage, did not outweigh these advantages.
One could infer therefore that this is all somehow a judgment of Solomon, designed to ratify a deal that was likely massaged a thousand different ways before it was originally put together some months ago, precisely in order to withstand careful scrutiny.
Nevertheless the independent scrutiny is careful, detailed and based on rational grounds that are laid out in great detail making them much harder to criticize. On this basis, therefore, one would have to conclude the proposal itself may now be much more likely than before to proceed without any further amendments.
Westfield Group Chairman Frank Lowy says simply the reorganization proposal… “creating two leading and independent groups, will generate greater long-term growth and value for both Westfield Group and Westfield Retail Trust investors”.