Deal to save US rival puts Westfield on edge

WESTFIELD is braced for some stiff competition in the United States after its rival General Growth Properties struck a $US2.65 billion ($2.88 billion) recapitalisation deal with Brookfield Asset Management.

By InvestSMART · 3 Apr 2010

By InvestSMART ·
3 Apr 2010

Comments

That move aims to end General Growth's bankruptcy but could also prompt the Simon Property group to sweeten the $US10 billion offer it made for the retail giant early last month.

In a statement on Thursday, the Canadian Brookfield, which owns the Australian developer Multiplex, confirmed it had struck the mega-dollar deal, along with its consortium partners Fairholme Capital Management and William Ackman's Pershing Square Capital, to help save General Growth.

The Brookfield funding is the cornerstone investment in the $US8 billion that General Growth is raising so it can repay all its creditors at par plus accrued interest.

General Growth has also entered into agreements for equity commitments from Fairholme Capital and Pershing Square of $US2.8 billion and $US1.1 billion respectively, and with Brookfield's assistance, is finalising the terms of a $US1.5 billion credit facility.

Following the recapitalisation, Brookfield expects to own about 26 per cent of General Growth's equity and will hold three of nine board seats in the recapitalised group.

General Growth and Simon are the two biggest retail landlords in the US after Westfield. Any merger of them would create a serious competitor to Westfield's North American operations.

All three groups own high-quality shopping centres across the US, at a time when the retail sector is struggling.

However, General Growth has firmly rejected Simon's first bid, saying it undervalued General Growth's assets, despite the latter having been trading as bankrupt for the past year.

US property analysts said other parties were expected to make better equity offers and Simon may also come up with with a better bid.

They speculated Westfield could be a possible player, as it had been in General Growth's data room undertaking preliminary due diligence.

But Australian analysts do not believe Westfield would make a full offer. Instead, it could pick up single assets should they became available.

Matthew Bertram, a property analyst at Deutsche Bank, has upgraded Westfield to buy.

In his view the most likely and optimal merger and acquisition outcome for Westfield would be single-asset or portfolio acquisitions alongside partners which were willing to take equity stakes.

"Westfield has a successful track record of co-investment with global pension funds. Asset level partnering lifts the return on equity, reduces project concentration risk and is generally successful given alignment of interest," Mr Bertram said.

"While the immediate merger and acquisition focus is the outcome of General Growth, in our view both the US private market and the UK may hold investment opportunities for Westfield in 2010."

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What was the Brookfield Asset Management recapitalisation deal for General Growth Properties?

Brookfield led a US$2.65 billion cornerstone investment as part of a larger US$8 billion recapitalisation package for General Growth Properties. The recapitalisation is intended to end General Growth’s bankruptcy and allow the company to repay all creditors at par plus accrued interest. As part of the restructuring, General Growth is also finalising a US$1.5 billion credit facility and has equity commitments from Fairholme Capital and Pershing Square.

Who are the consortium partners involved in saving General Growth and what stakes do they take?

The consortium includes Brookfield Asset Management, Fairholme Capital Management and William Ackman’s Pershing Square Capital. Fairholme has committed about US$2.8 billion, Pershing Square about US$1.1 billion, and Brookfield’s funding is the cornerstone. After the deal, Brookfield expects to own roughly 26% of General Growth’s equity and to hold three of nine board seats in the recapitalised group.

How does the recapitalisation affect General Growth’s bankruptcy and its creditors?

The recapitalisation is designed to lift General Growth out of bankruptcy by raising about US$8 billion so the company can repay all its creditors at par plus accrued interest. The Brookfield funding is a key part of that plan, together with equity commitments and a planned US$1.5 billion credit facility.

Why did General Growth reject Simon Property Group’s first takeover bid?

General Growth firmly rejected Simon Property Group’s initial US$10 billion-style offer because it said the bid undervalued General Growth’s assets, even though the company had been trading in bankruptcy for the past year.

What does this mean for Westfield — could it be a buyer or face more competition?

The deal increases competition in the US retail property market. General Growth and Simon are the two biggest US retail landlords after Westfield, so any tie-up or strengthened rival would be a serious competitor to Westfield’s North American operations. Westfield had been in General Growth’s data room for preliminary due diligence, but Australian analysts in the article think Westfield is unlikely to make a full takeover bid and is more likely to pursue single-asset purchases if opportunities arise.

What acquisition strategy might Westfield pursue in response to these US opportunities?

Property analysts cited in the article expect Westfield’s most likely strategy would be single-asset or portfolio acquisitions carried out alongside partners that take equity stakes. This kind of asset-level co-investment with global pension funds can lift return on equity, reduce concentration risk and align interests between partners.

How are US retail market conditions influencing these deals among mall owners?

Although the retail sector is described as struggling, all three groups — Westfield, General Growth and Simon — own high-quality shopping centres, which keeps them attractive to bidders and investors. Analysts expect other parties to make improved equity offers and for potential rival bids to be sweetened despite broader retail challenges.

Could Simon or other buyers still sweeten their offers for General Growth?

Yes. The article notes US property analysts expect other parties to make better equity offers and that Simon Property Group may come up with a better bid. The Brookfield-led recapitalisation reduces bankruptcy risk for General Growth but does not rule out renewed acquisition interest or higher offers from rivals.