Unibail Rodamco-Westfield: 2 Views from the same Broker

Unibail Rodamco (UL) announced a friendly takeover offer for Australia-based Westfield (WFD) in a deal that values the Australian mall operator at c$25 bn (on EV basis).

Interestingly, Bank of America Merrill Lynch has analysts covering both companies. Following the transaction, the team covering UL has maintained its Buy rating while the one covering Westfield has moved to « Not Rated », arguing that « WFD is no longer trading on the basis of fundamentals. »

Here are UL’s analysts’ comment published earlier today:

« Having taken a cautious approach and tone to corporate deals for the best part of 10­yrs since the Rodamco deal, Unibail has this morning again entered into the world of transformational M&A. Their proposal to acquire Westfield would cement their place as the European key name in malls, and adds a new exposure to the US. In our view, Westfield has a similar philosophy to Unibail in terms of focusing on only the key dominant malls in the best markets. Retail is increasingly a global business, and broader tenant relationships could drive benefits. As such we see the industrial logic of a tie up. UL also believes the deal has been structured in an accretive way and keeps the LTV under 39%. We reiterate our Buy rating and will review the deal in more detail.

(…)

The offer implies a value per WFD security of A$10.01/share based on UL closing price €224.1/share. This is a 17.8% premium to last close and 22.7% to 3M VWAP. WFD holders would receive 0.01844 UL securities plus US$2.67 in cash for each share. The Lowy family, founders and major investors in Westfield, has entered into a Voting Agreement providing they will not sell their interest and will vote in favour. Frank Lowy will be chairman of an advisory board. UL has acquired a 4.9% interest in WFD in advance. The deal is subject to customary conditions and would close H1 2018. »

Now here are the comments from ML’s team in Australia:

« The implied offer price of A$10.01/share translates into a 2018 FFO multiple of 21x and dividend yield of 3.5%. This compares to MAC and GGP trading at 15-16x multiples after the recent corporate activityBy our estimates, the UL offer implies a cap rate of 3.95%, vs WFDs Jun17 book cap rate of 4.61%  a tight price given two-thirds of WFDs Regional portfolio are ranked as class-B or below. Interloper risk can never be ruled out in M&A, but in our view fundamental metrics suggest the likelihood of a competing bid is low.

Not a done deal yet

Under the laws of Australia, a takeover via Scheme of Arrangement requires approval from 75% of unitholders by value and 50% by number. The Lowy family has agreed to vote its 9% stake in favour while ULs 4.9% will be conflicted out;shareholder voting is expected in 2Q18. Both parties have agreed to a US$150m break fee should they be responsible for the deal not proceeding, and the Material Adverse Effect clause covers a 70m negative impact to ULs earnings and US$35m to WFDs FFO (around 5%).

High-quality malls should continue to gain attention

Readthroughs of the other Australian retail REITs are not straightforward given the geographic differences, but the WFD deal highlights that high-quality malls will continue to get the attention of stakeholders. In Australia, we like SCG (Buy, $4.60 PO) for its pure-play exposure to class-A malls which, in our view, are positioned for longevity despite the perceived headwinds facing the traditional retail sector. »

Both comments offer some complementary light on the deal.

One has to put this transaction in a moving world where the existence of malls is facing a number of challenges, the most important one being the ability for mall operators to grow the traffic of consumers and be able to leverage this traffic to increase the rents.

This means being always proactive (active asset portfolio management) and selective (finding the best locations and be able to attract the brands that will attract consumers).

But on the face of intense competition from e-commerce (Amazon), the fundamental question is: is this a defensive move or do retail/malls still have any relevance regarding changing consuming habits ?

In the end, for UL’s shareholders the question to ask management would be: is size the only factor that really matters to be able to generate a decent and sustainable return in the long run ?