Frank Lowy’s grand corporate restructuring of his twin property empires, the Westfield Group and the Westfield Retail Trust, is in trouble and, as an irascible 82 year old billionaire accustomed to having his own way, so far he may not be dealing with it very well.
Shareholders of his main shopping centre development company, the Australian Stock Exchange listed Westfield Group, approved the restructuring proposals by the necessary majority at a shareholders meeting yesterday. However, also yesterday, Shareholders of Westfield Retail Trust, which is also listed on the Australian Stock Exchange failed by a very small meeting to approve their side of the deal. The vote was tantalisingly close, at 74.1% once all the proxies were counted, just short of the 75% majority required to get it through.
A number of readers may recall that Frank Lowy’s restructuring proposals called for all of the Westfield Group’s domestic retail assets, i.e. its Australian and New Zealand shopping centre interests, as well as its land held for development, would be spun out of the Westfield Group and placed within the Westfield Retail Trust itself, which is a separately listed real estate investment trust.
Under the provisions of the proposed new reorganisation, however, by the time all the new assets were put into the Retail Trust, together with substantial associated corporate debt, it would become a rather different investing animal, and indeed become more of a development company rather than a relatively safe cash cow, though admittedly still less aggressively focused on development than Westield Group itself. Even so, the proposed increased levels of debt would also increase its risk profile.
Safety indeed had been a large part of the original rationale for the Retail trust’s creation when Westfield Group had earlier spun out a number of its shopping centres, including many half interests, into the trust when it was formed. The Retail Trust had been created in 2010 as a cash flow oriented, relatively safe, investment vehicle holding mature properties, suitable for pension funds and other institutional investors seeking mainly income rather than capital gain.
The reorganisation also called for the Retail Trust to then independently manage its properties, and inherit some of the Westfield Group’s property operating management team to do just that. The Trust would also absorb the Westfield Group’s domestic Australian development management team, and subsequently develop a pipeline of undeveloped properties, and redevelopment of existing assets as well.
To accomplish all this, the relative shareholdings of holders of both Westfield Group’s and Westfield Retail Trust’s shares would be re-apportioned to reflect the changes that were intended to be made.
As one last wrinkle, and the one which finally proved to be the sticking point that brought the proposed deal to its knees from the point of view of shareholders of the Retail Trust, Westfield Group had demanded a large capital sum, to be reflected in the relative shareholdings post-reorganisation, to compensate for giving up the management fees that hitherto it had been charging the retail trust every year to manage its properties. Logically the request is perfectly reasonable, but the price placed on it was in the end considered too high.
Reflecting all of the above items, in the end existing Westfield Group shareholders were to be given 48.6% of the shares of the newly enlarged Retail Trust, which would then be renamed the Scentre Group. The currently existing shareholders of Westfield Retail Trust were to get to keep 51.4% of it for themselves. And those two numbers are what the whole argument devolves down to.
Over the last several months a number of institutional shareholders of the Retail Trust, normally considered to be fairly placid and passive voices in Australia, had publicly criticised the plan and demanded changes. In an initial sop to their concerns Frank Lowy sweetened the deal very slightly, by about $300 million, but not nearly enough to assuage their concerns, leading to yesterday’s revolt.
Both are very substantial companies, with Westfield Group currently valued at around US$20 billion and Westfield Trust at around US$9 billion.
As the acrimony flared yesterday, the meeting of shareholders of the Retail Trust yesterday was finally postponed for two weeks by the chairman of the meeting, in order to give Westfield Group, and Frank Lowy in particular, time for further reflection, reconsideration and for his investment bankers to intermediate discussions between himself and some of the Retail Trust’s largest shareholders before calling the decision final.
In response, Frank Lowy for now seems to be ready to go ahead with his “nuclear response” to this institutional shareholder defiance of his munificence. This was affirmed at the shareholders meeting of the Westfield Group itself, which also took place yesterday on May 29th, when he told his own shareholders that his plan for hiving off of its domestic assets would go ahead even if the Retail Trust rejected taking them. Of course if that actually happened the market could then end up with three separate publicly listed Westfield companies, which might be a little awkward for everybody.
Westfield Group had actually confirmed this to the Australian securities regulators the evening before both yesterday’s meetings, after holding a Board of Directors Meeting of the company. But, the information was not disclosed publicly until Frank Lowy then made the comments at the Westfield Group meeting.
Lowy’s sons, Steven and Peter Lowy, are today Co-CEO’s of the Westfield Group, but this hardball approach to their institutional shareholder base is vintage Frank Lowy. It remains to be seen whether he will continue to weave his magic spells, that have brought his investors along for the ride in past, to the substantial profit of all concerned to be sure, or whether this time he will have to make a more significant concession on the relative valuations of the two companies, post-reorganisation, to bring the deal home.
Lowy’s problem is that the Retail Trust has been seen as a much lower risk, investment vehicle and therefore attracted a more conservative shareholder base. Indeed that is precisely the perception that they were sold on to begin with by Lowy himself when he created the Trust in 2010 when he spun off some of his properties into it in the first place.
Westfield Group, on the other hand, is indeed an international development vehicle, developing trophy malls around the world, in places like the new World Trade Center. People don’t mind change, even substantive change, but only if the numbers really do work and fairness is perceived as the basis for a transaction. Clearly Frank Lowy has a lot of talking to do in the next couple of weeks. If it still does not fly recriminations may then come fast and furious.