Westfield's season of investor discontent

The focus on the results of the two Westfield vehicles today was never going to be on their performance – which was in line with guidance – but on whether the Lowys would blink in the face of investor opposition to the terms of their proposed restructuring of the Westfield empire.

They didn't. Peter Lowy said that the proposed split of the group into independent Australasian and international vehicles would go ahead on the terms that were announced in December. Westfield Group’s Australasian interests – and the management rights to them – would be backed by a rebadged Westfield Retail Trust.

The investor unrest, which surfaced almost as soon as the proposal was unveiled, isn’t related to the concept of the restructure.

The Australasian interests housed within Westfield Group and Westfield Trust are high-quality, low-risk assets generating strong and consistent cash flows from a mature portfolio of shopping centres.

The international business, centred on the US and UK, has a far stronger development element to it. Potentially there could be far more growth from its big pipeline of future developments, but with significantly more risk and volatility.

The different risk and maturity profiles of the portfolios and their appeal to different sets of investors underpins the logic for their separation.

The Lowys clearly believe the international business (which is where their attention will be devoted and where the bulk of their own investment will ultimately be) will be regarded differently by international property investors after the separation. The Australasian assets appeal to yield-conscious investors with a low appetite for risk.

The terms of the separation, however, have divided investors.

Under the proposal, Westfield Group will merge its Australasian operations with Westfield Retail Trust. It will be renamed Scentre Group.

Westfield Retail Trust securityholders would get 918 securities in the new group and $285 cash for every 1000 WRT securities they hold, while Westfield Group securityholders would get 1000 securities in the new Westfield Corporation and 1246 in Scentre Group for every 1000 securities they hold.

It didn’t take analysts and fund managers long to realise that the proposal would see a very big ($1.9 billion) reduction in Westfield Retail Trust’s net tangible assets and an $8 billion increase in its debt.

While it makes sense to shift a disproportionate share of the existing debt into the new Scentre, the terms implied a massive price-tag on the management rights that Westfield Group would be vending into the transaction. There are some estimates that the transaction implies $3.5 billion of value for those rights.

The investor discontent is a threat to the proposal, which requires the approval of securityholders in both the existing entities.

It is clear from Peter Lowy’s comments today that the Lowys have no intention of altering the terms, which they argue reflect the relative incomes and market values of the two entities. The restructuring is to be accretive for Westfield Retail Trust securityholders.

It is probable that investors in the trust are going to be presented with a ‘’take it or leave it’’ ultimatum when they vote on the restructure in late May.

It is also conceivable, if they successfully opposed the transaction, Westfield might still spin-out its Australasian assets and create a competing entity with interests in many of the same core assets as the trust. This wouldn’t be ideal for the trust’s securityholders.

Westfield plans to issue an explanatory memorandum on the transaction in late April. This may help dispel some of the cynicism about the terms and the suspicion of a large-scale value transfer from Westfield Retail Trust towards the new Westfield Corporation.

The memorandum can be expected to both provide more precise numbers on the valuation of the management rights and the arguments that support the valuation.

However, there is a big overlap of investors in both entities who would have few concerns about where the value flows. Given that the proposal has logic – and that the alternative for Westfield Retail Trust securityholders is disappointing sharemarket performance – one suspects the Lowys will ultimately prevail.