Investment Matters

Reflections on Westfield

Last week Westfield Corporation (ASX Code: WFD) received a takeover offer from European based property company Unibail-Rodamco, at an equivalent of A$10.01 per security (as part cash and part script – with some complexities that we won’t go into in this article).    This is a 17.8% premium over the last trading price before the announcement.

Clients with a property allocation have an investment in Westfield Corporation.

Westfield Corporation is the owner of (mostly high-end) shopping centres in the USA and the UK, and development assets including a major new centre being built in Italy.

[Note: Westfield centres in Australia are owned by the Scentre Group, following the last major corporate restructure in 2014, see below.]

Reaction

I was a bit surprised when the announcement came across the wires.  Firstly, Westfield is so intrinsically linked to the Lowy family.  It was founded by Frank Lowy with the first centre in Sydney’s west opening in 1959.  Frank, followed by his sons, built a shopping centre empire over the subsequent almost six decades.  They steered the business through many difficult economic times, with the market cap of Westfield Corporation currently AU$17.7billion (pre-offer).  They own 9.5% of Westfield’s (WFD) securities (source: IRESS), with Frank being Chairman and sons Peter and Steven running it (as co-Chief Executive Officers).

Given all of this, their agreement to sell (subject to the approval of other security holders) was not at all insignificant.

It was advised that Peter Lowy will have a role in the combined entity – but it does not appear to be significant as his previous co-CEO role.  Additionally Frank and Steven Lowy do not appear to have any role in the combined entity.  They have indicated that they will retain an investment (one assumes through the script component of the offer), but what value and how long for is not certain.

What does it say?

The offer price is somewhat attractive relative to recent levels.  But there has been a dip in WFD’s security price over the last year, as seen by the following graph.  It certainly doesn’t appear like an offer to be high-fiving over.

 

Source: IRESS, First Samuel

In our minds, there are two key (and related) takeaways from the takeover offer (and it being recommended by the Lowys).

1. What it says about the retail environment

It is tough out there, not just in Australia.  This is driven by many factors – some country-specific (such as in the US the oversupply of retail floorspace), and some more widespread, such as the impact of the internet on retailing (and that is not just Amazon) and the longer term dampening impact of high consumer debt levels.

Westfield stores are considered more resilient – they are located in better catchments with higher foot traffic and are generally in higher socio-economic areas.  They can command a premium in rental income / sqft, and can attract the higher end retailers.   It also has a strong development pipeline (brownfield, and greenfield Milan).  However, pursuing this offer is preferred, as compared to operating and investing in itself for the medium to long-term.

2. Can’t re-engineer any additional value

The Lowys have been the kings of financial re-engineering.  Westfield has a serial history of corporate restructuring. 

The last two restructurings were in 2010 and 2014.  In 2010 it effectively split half of its Australian assets into a new entity called Westfield Retail Trust (ASX Code: WRT) (via a JV).  Westfield Group (ASX Code: WDC) retained the other half of the Australia assets, management of the Australian assets, and the ownership and management of the US / UK assets.

In 2014, all the Australian assets with split off into a new entity Scenture (ASX Code: SGC), including management of the assets, and continued use of the Westfield brand.  The overseas (US / UK) assets were put into a new listed entity Westfield Corporation (ASX Code: WFD).  This is the current structure.

The announcement of the 2010 WRT demerger advised that proposal (which security holders agreed to and was enacted) ‘was the latest in a series of capital restructures that Westfield Group has undertaken over its 50-year history.’, and Frank Lowy said, “We have continually evolved our capital structure to position the Group for growth” (ASX announcement 3-Nov-10).

And that about sums things up.  It appears that the Lowys have come to the conclusion that there isn’t any meaningful earnings growth in the outlook – even if were to do some more re-engineering.  Therefore, agreeing to the takeover was the best outcome.

Conclusion

Westfield, under the stewardship of the Lowy family, has grown from a single shopping centre in Sydney’s west to a renowned international brand owning assets worth billions across Australia (spun into Scentre), the USA and the UK.  It has had a long, and complex, corporate history. 

However, it now appears a challenging short to medium term earnings growth outlook, along with an inability to gain advantage through another financial engineering iteration, have culminated in the recommendation to accept a takeover offer.

And finally, your Investment Team wishes you a very happy Christmas.