Breakingviews – Westfield’s $25 bln deal is mere retail therapy

HONG KONG ( Breakingviews) – Buying $25 billion worth of malls is mere retail therapy. Westfield, the global piece of an empire started back in 1960 by Australian magnate Frank Lowy, is selling itself to European commercial property group Unibail-Rodamco. The combined company will be a tangled mess and merger savings are scant. Given consumer trends, getting bigger may be a temporary mood enhancer.

The deal adds 35 shopping centres, including in London and upscale U.S. markets, to Unibail-Rodamco’s bulging portfolio. Lowy says its new owner offers a “natural home” for Westfield, while Unibail-Rodamco touts a “compelling opportunity” to realise advantages neither could achieve on its own.

And yet obvious financial benefits from putting the two together are limited. Unibail-Rodamco promises 100 million euros ($118 million) of synergies. About 40 percent of them are to come from revenue uplift, which can be elusive. Even generously assuming all are achieved and avoid taxation, they’re worth far less today than the $2.1 billion premium being paid to secure control of Westfield. 

What’s more, the transaction creates a labyrinthine structure of the sort that can lead to market discounts. Investors are getting stapled securities, an Australian peculiarity that will bind Unibail-Rodamco shares with those of a newly formed Dutch company housing Westfield’s U.S. operations. To complicate matters further, this new entity is due to become a real estate investment trust with two classes of shares.

Unibail-Rodamco intends to undertake the integration of this colossus and implement its tortuous architecture as the shopping-centre business model comes under increasing threat. Westfield’s sites and variety of tenants could make them better positioned than some rivals, but there is more work to be done as shopkeepers succumb to e-commerce, leaving mall owners to chase new occupants.

Lowy, like other Westfield shareholders, will be paid partly in stock, and thus wind up with a stake in the merged group. Even so, he has agreed to offload the company he spent nearly six decades building for A$10.01 a share – short of a recent high reached in July 2016. Signs keep stacking up about the trouble facing brick-and-mortar shopping. This deal, and others like it seeking scale amid the destruction, adds to the list. 

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