A setback for the Westfield empire

It would appear a reasonable assumption that had the vote not been deferred, the proposed deconstruction of the Westfield empire would have been voted down by Westfield Retail Trust security holders today. The deferral appears designed to give those opposed to the restructuring time to digest the implications of an adverse vote, which aren’t pleasant.

With proxies in support of the proposal of only 74.1 per cent, agonisingly short of the 75 per cent required to get it across the line, Westfield Retail Trust’s chairman Dick Warburton responded to a positive vote on a non-binding motion from the floor to adjourn the meeting by declaring the vote deferred to a date to be fixed.

The restructuring would see the Australasian assets of Westfield Group hived off from its international operations and merged with Westfield Retail Trust’s assets to form Scentre Group.

The failure to get the deal across the line is a major embarrassment and setback for Westfield, the Lowy family and the advisers involved, given the intense lobbying of shareholders that preceded the vote.

The ostensible reason for the deferral was to give security holders time to absorb comments by Westfield chairman Frank Lowy, at the earlier meeting of Westfield Group security holders that voted in favour of the proposal.

Lowy told that meeting that last evening the board of Westfield Group had met and decided that if WRT security holders didn’t approve the transaction, they would still pursue the separation of Westfield Group’s Australasian businesses from the international operations.

Given that the assets concerned include shopping centres that WRT co-owns but which Westfield Group manages (as well as a development business) that would be a destructive outcome for WRT security holders.

While Lowy’s disclosure of Westfield Group’s fall-back position was described as “oppressive” and as “strong-arm tactics” by the Australian Shareholders’ Association and was undoubtedly deployed as a last-ditch tactic to try to get the deal across the line, there is also no doubt that it was relevant and very material information that security holders in both the entities needed to know in order to make an informed decision.

That fall-back strategy was in fact canvassed as an option for Westfield Group in the scheme documentation for the proposal, so security holders should have been aware it was a potential outcome if they voted the scheme down.

Nevertheless, the outcome of the board meeting and commitment to the plan was definitely a disclosable event. It would have been preferable if the Westfield Group board had committed itself to that Plan B earlier and given security holders the time to absorb it and its implications ahead of the meeting. Today’s debacle could have been avoided.

Given the narrow margin between success and failure revealed by the proxy votes, one suspects the coercive aspects of the threatened plan to push ahead with a structural separation of Westfield Group’s businesses without WRT might be sufficient to get the deal across the line when WRT security holders reconvene sometime in the next fortnight or so.

No one disputes the strategic logic of the proposal, which would permanently distance the offshore assets and the bigger development profile of that international business from the mainly passive but very high quality Australian portfolio.

It was the terms of the deal – the value attributed to Westfield Group’s operating platform in Australasia and the level to which the new Scentre would be leveraged – that some security holders objected to.

Despite the aggressive lobbying, support from the WRT board and their independent expert and the tinkering with the terms earlier this month -- when the amount of debt that would be transferred into Scentre was reduced by $300 million, with a consequent increase in its asset backing -- it would appear Westfield wasn’t able to convince enough WRT security holders that the terms were fair.

Now Westfield can only hope that a bit more time and an opportunity to think through the now-known consequences of voting down the scheme will enable it to avoid having to actually carry through with its threat and push the button on an option of last resort that would produce a messy and sub-optimal outcome for both entities, but particularly WRT.