February 22, 2018

Breakingviews: Westfield’s $15 Billion Sale is Dangerously Discounted

by Breakingviews.

Beware any chief executive without a Plan B. Westfield boss Peter Lowy is the latest to lack one, declaring on Thursday that despite a big drop in the value of a takeover bid from Unibail-Rodamco, there is no alternative to the sale he and his mall operator agreed in December, originally worth $25 billion including debt. The French buyer also says it has no intention of changing the deal terms. Investors could be forgiven for having other ideas.

The transaction unveiled just before Christmas promises to establish a hulking landlord overseeing a sprawling empire from offices in Paris to shopping centres in California. For all the complexities of joining Unibail-Rodamco and Westfield, however, there are precious few synergies, whose present value – as calculated by Breakingviews – fell well short of the original premium on offer. And the new year has brought with it fresh concerns about the combination.

A rise in bond yields and the Australian dollar has altered the financial calculus. What was once 18 percent extra over the undisturbed price to Westfield shareholders to assume control of their company is down to just 5 percent. About three-fifths of the consideration – currently worth about $14.6 billion – is in Unibail-Rodamco stock. Its value has tumbled alongside other real estate companies whose fortunes often track those of the fixed-income market. The cash component, being paid in U.S. dollars, also is now worth less.

Although the acquisition has insulated Westfield’s shares from the wider industry slump, Unibail-Rodamco’s have suffered worse than peers such as Simon Property Group and Deutsche Wohnen since the takeover was announced. That suggests many of the touted benefits from putting the two companies together may be lost on investors.

Market conditions were already precarious because of worries about brick-and-mortar retail, so Westfield might have benefited from a so-called cap and collar provision that protects companies involved in deals from such wild price swings. Instead, it could now be harder to persuade shareholders of the merits of the enlarged group and Lowy might be pressured to seek a higher price from Unibail-Rodamco. With votes required at both companies to seal the deal, there may yet be time to formulate a Plan B.


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