Westfield may have to sweeten split terms

Westfield is facing an investor backlash to its proposed split, with institutional managers threatening to vote the deal down if the share component of Westfield Retail Trust is not reworked.

Westfield is facing an investor backlash to its proposed split, with institutional managers threatening to vote the deal down if the share component of Westfield Retail Trust is not reworked.

The concern is the gearing level of WRT is too high and would require partial asset sales to joint-venture partners, which could dilute the underlying asset portfolio.

WRT's units have dropped in value since the announcement that Westfield was splitting its business in two, to focus on the international developments under the Westfield Corp banner and the Australia and New Zealand business (including WRT) to be renamed Scentre Group.

Under the deal, WRT investors are being offered $285 and 918 securities in the new Scentre Group for every 1000 WRT securities held.

It was suggested a number of investment banks are now looking to rework the WRT deal to address investors' concerns.

The proposal is subject to approval by 75 per cent of Westfield and WRT security holders at meetings expected to be held next May. It also remains subject to a number of conditions including court and regulatory approvals as well as debt financing and restructuring of contractual arrangements.

Analysts said the deal was undertaken to address investors' concerns of WRT, which had been an underperformer since it was spun-off from Westfield in 2010.

John Kim at CLSA said the proposed transaction was an acknowledgement by Westfield Group that the WRT experiment has been a "disappointment", given the huge transaction costs involved and WRT's discount to net tangible asset (NTA) since listing in December 2010.

"Another negative from the transaction is that pro-forma gearing in the new Scentre will be 38.2 per cent, considerably higher than WRT's 21.5 per cent, with S&P putting WRT's A+ credit rating on CreditWatch negative," Mr Kim said.

"We appreciate that the new group will have a significantly higher asset base of $28.5 billion compared to WRT's $13.7 billion, with active earnings from management income, nevertheless it is still a material increase in gearing."

Andrew Smith, fund manager at Freehold Investment Management, said by splitting into geographic domiciles, Westfield's management was attempting to maximise value for the two entities.

But he added: "Although there is some time for the deal to be worked on, there is the prospect of the terms of the deal being reworked or sweetened to get approval from WRT investors.

"Prima facie, these suggested changes for WRT make sense and the new vehicle Scentre will have a lot more appealing characteristics than the former WRT."

Mr Smith said these strategies would ensure earnings growth would be far superior than otherwise would have been the case.

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