Regulators and commentators are properly pouring over just how to sort out the Westfield mess. But the real essence of the matter is whether Westfield Retail Trust shareholders should accept Plan A (proposed by the Lowys to bring together all the Australian assets under one roof) or Plan B, where there will be two separate listed Australian companies and Westfield Retail Trust will basically stay as it is.
As we look at the effect of each of these plans on Westfield Retail, the strategy and stance of UniSuper becomes very important.
Let’s assume that the Lowys’ Plan B is implemented, because Westfield Retail Trust shareholders were about to reject Plan A when the meeting was adjourned. Plan B was never discussed in detail at the first meeting -- it was a new event.
Under Plan B there will be two Australian companies: Westfield Retail Trust and 'NewCo'. In essence, NewCo will own all the assets that the Lowys want to sell to Westfield Retail Trust (a 50 per cent stake in the Westfield properties in Australia, as Westfield Retail has the other 50 per cent). There will be a perpetual management agreement over those shopping centres, which means that NewCo will manage all the jointly owned shopping centres for a share of the revenue plus out of pocket expenses. Newco will also have a small development arm.
Under Plan B, the initial shareholding in NewCo will be Westfield Group shareholders. But as we saw with the previous split a decade ago, there will be considerable realigning of interests over time.
Under Plan B, investors will have a choice of investing in the centres via Westfield Retail Trust or via NewCo, which will have the same stake but will also manage the centres and will have a development arm.
I suspect that once the market settles down, most institutions will invest in the company that manages the centres, so NewCo will carry a premium over the passive holder Westfield Retail Trust.
So why would UniSuper be very happy to have its investment in Westfield Retail Trust as the second player?
UniSuper is one of the more sophisticated yield players in the country. It has made it clear that it will be a buyer of additional equity in Westfield Retail Trust if Plan B goes ahead.
Assuming NewCo shares reach a premium, then Westfield Retail Trust will go to a discount and be a magnificent yield play for UniSuper.
UniSuper has about 8.5 per cent of Westfield Retail Trust and may be able to go to 20 per cent at discount prices if my market scenario plays out. Because Westfield Retail Trust doesn't manages any centres, its directors have a limited range of duties (except when there are reconstructions).
A short-term paper loss (but no reduction in income) would be a small price to pay for an increased supply of low priced Westfield Retail Trust equity.
UniSuper was very skilled in the lead-up to the Westfield Retail Trust meeting in being able to convince the managers of its various portfolios to also use the votes on Westfield Retail Trust stock held for other clients to support the UniSuper push for the rejection of Plan A.
Now those fund managers will need to make an independent judgment for their non-UniSuper clients and not cast a vote on a 'mates basis'.
Of course, after a hard second look, the managers may still back UniSuper for their other clients if the long-term strategies of those clients align with the super fund. And many of the managers were unhappy with the price tag put on the management rights agreement in the Plan A deal.
Under Plan A, which failed to get the required 75 per cent vote at the first meeting, Westfield Retail Trust would be given a new name and would own and manage 100 per cent of Westfield's Australian properties.
The 50 per cent of the centres not owned by Westfield Retail Trust are to be bought from Westfield Group at book value, while the management rights transfer is at a price related to similar transactions.
The price created controversy. If Plan A were approved, Westfield Retail Trust would be able to lift its dividend, although part of the dividend rise would be created by increased gearing. Westfield Retail Trust is currently leveraged to 26 per cent but this would rise to 30 per cent under the Plan A deal. Under Plan B, NewCo will also have a similar gearing. That extra leverage was also a subject of controversy.
As I have argued previously, this has not been a well-organised transaction. The rationalisation between overseas and locals now being contemplated should have taken place when Westfield Retail Trust was set up.
If you are a yield investor like UniSuper, then you will see a possible decline in the market value of Westfield Retail Trust as a wonderful long-term buying opportunity. But not many people are in that position.
Plan A is the safer option. However, many Westfield Retail Trust shareholders believe they are paying too much for the assets, particularly the management rights, and at the first meeting also believed the Lowys would sweeten the deal under pressure. Now that is unlikely to happen. So, whether you like it or not -- whether it is fair or unfair -- every Westfield Retail Trust holder must make a choice. The issue is very different from that which went before the first meeting.