Westfield's split signals a shift to an offshore focus

Westfield has always had an unusual willingness to adapt its corporate structure to its environment, with that structure undergoing regulatory and radical transformations over more than half a century of its listed existence. Today, the Lowys announced the latest (and perhaps the final) phase of an evolution that has been accelerating since the financial crisis.

Frank Lowy and his sons have long demonstrated an unmatched level of pragmatism towards Westfield’s corporate form.

A decade ago, in order to create the scale to pursue their global ambitions, they consolidated the three corporate entities they controlled – each with a market capitalisation of around $8 billion – into a single vehicle. This enabled them to fund about $22 billion of investment, most of it in offshore development.

Post-crisis, with their security price depressed, they changed tack. They spun out half their core Australian portfolio of retail centres into a new vehicle: Westfield Retail Trust.

That released a big chunk of capital for Westfield Group to fund its development pipeline while leveraging the return on the capital it still had tied up in the trust via management and development fees. The Lowys also began selling off interests in some of their international centres to third-party investors to release more capital and further leverage returns.

Today Frank Lowy announced the latest step in the distancing of Westfield Group from the Australasian shopping centre portfolio on which the group (and the Lowys’) fortunes were built.

The Australasian businesses of Westfield Group and the Westfield Retail Trust are to be merged and re-badged as Scentre Group. The management of the Australasian businesses will be internalised.

Westfield Group, which contains the international portfolio of centres and a massive development pipeline, will be renamed Westfield Corporation.

There will be no equity relationship linking the Australasian and international operations for the first time since Westfield began its offshore expansion in the 1980s. However, Frank Lowy will remain chairman of both operations, and the local centres will continue to trade under the Westfield brand.

Westfield may have been disappointed at the relatively lacklustre performance of the securities in both Westfield Group and Westfield Retail Trust since that last restructuring. However, there are also some practical benefits that will flow from the new restructure.

The final separation of the local and international operations will create two very distinct property groups operating in different geographies and currencies and with quite different characteristics.

Scentre Group will contain easily the best portfolio of retail centres in Australasia, with $28.5 billion of prime retail property assets. The internalisation of its management should add material value.

Westfield Corp will have total assets of $US17.6 billion in the US, UK and Europe and a $US9 billion development pipeline.

By separating the two sets of assets completely, Westfield may hope to tap into two quite different types of investor bases with different risk appetites, as well as investors in different geographies.

The Scentre portfolio generates largely passive income while Westfield Corp, apart from operating in a different hemisphere and different currencies, has a significant level of active and higher-risk income flowing from its development activities.

The split, which creates two purer plays, could see each entity re-rated because their profiles will be clearer, more focused and more easily compared to their peers. Scentre will also be able to use its excess cash flows for capital management rather than supporting the group’s offshore developments.

The separation is to be effected by demerging Westfield Group’s Australasian business and merging into with Westfield Retail Trust, with Westfield Retail securityholders receiving $850 million in cash via a capital return and an aggregate 51.4 per cent of the new Scentre Group. Westfield Group securityholders will get securities in the new Westfield Corp on a 1:1 basis as well as 1.246 Scentre securities for every Westfield Group security held.

The board of Westfield Group will become the board of Westfield Corp and Westfield Retail Trust’s board will form the Scentre board. Steven and Peter Lowy will be co-chief executives of the international entity, although Peter Lowy has foreshadowed stepping down as an executive (but staying on as a non-executive) in about 18 months’ time. Westfield Group’s chief financial officer, Peter Allen, will be the chief executive of Scentre.

The re-naming of Westfield Retail as Scentre has a tone of finality to it.

With the 2010 spin-off of the Australian retail centres and the Lowys’ having sold their own stake in Westfield Retail for about $660 million earlier this year, there has been a sense that the family had become more interested in the offshore businesses than in the foundations on which Frank Lowy’s empire and his family’s fortunes were built. The latest proposed restructure tends to confirm that.