Split a 'win-win' for shareholders

In one of the biggest shake-ups in the retail sector, Westfield Group is splitting its international business from its Australian and New Zealand operations, in its second major restructure in three years.

The deal is expected to send shockwaves through the retail mall sector with asset sales and joint ventures tipped as the new vehicles realign their portfolios.

It comes at a time when retailers and landlords are facing tough times with the rise of internet shopping and a continued slowdown in sales for traditional apparel and discretionary goods. That has led to a drop in rents for new tenants of about 5 per cent.

In response, Standard & Poor's has downgraded its long-term corporate credit rating on Westfield Group and Westfield Retail Trust to credit watch with "negative implications".

Having spun off WRT in December 2010, the company will merge that business with its Westfield Group to create the new Scentre Group. It will own and manage all the 47 Australian and NZ malls, with total assets of $28.5 billion.

The centres will remain badged as Westfield and the new company will be run by the current Westfield finance director Peter Allen.

The overseas business - 44 shopping centres across the US and UK worth $17.6 billion - will be renamed Westfield Corporation and will be run by the current co-chief executives, Peter and Steven Lowy.

In the coming 18 months, Peter Lowy will step down from the direct CEO role to become a non-executive director, leaving the day-to-day running of the empire to his younger brother, Steven, who plans to relocate to the "northern hemisphere". Under the terms of the deal, Westfield unitholders essentially have the same economic position they had before the deal.

Westfield Corp unitholders will receive units in the new Scentre entity, thereby maintaining their economic interest in this business.

Current WRT shareholders will receive $285 and 918 shares in the new Scentre for every 1000 WRT units shares held. The cash will come from an $850 million capital return, equal to a buyback of WRT units at $3.47.

Westfield Group shareholders will receive 1000 shares in the new Westfield Corp and 1246 shares in Scentre for every 1000 shares owned. WRT closed on Wednesday at $2.99, while Westfield Group rose 42¢ to $10.72.

Westfield's non-executive chairman, Frank Lowy, said the proposal was expected to deliver 5.2 per cent growth in WRT's earnings and 2.9 per cent for Westfield Corp.

"This is a win-win deal. There is no question about the growth prospects for Australia. We looked at this six months ago but it emerged relatively quickly," Mr Lowy said.

Macquarie Equities analysts said that while a Westfield Group unitholder will initially be in the same position they are in today, the future direction of Westfield Corp will be different, with a focus on overseas markets and presumably a greater proportion of higher returning development activity (in proportionate terms).

"There continues to be apparent value in WRT based on the preliminary maths, however this entity will clearly be lower-growth, with exposure only to Australia/NZ and post implementation facing a potential stock overhang as Westfield unitholders may seek to exit their position in this entity," the analysts said.