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Unibail-Rodamco Acquisition of Westfield

Co-Authored by Merrie Frankel

For those of us in the retail real estate industry, the December 12 announcement that Unibail-Rodamco, Europe’s largest listed commercial property company, reached an agreement to purchase Westfield, the Australian owner of Class A malls in the US and UK for cash and stock worth approximately US$16B, or $25B including assumption of liabilities, was big news.  

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Here are some fast facts about the companies, the transaction and our thoughts about it:

Overview of the Portfolio: Unibail-Rodamco currently owns 69 shopping centers in 11 European countries and Westfield owns 35 malls in the US and the UK, with no geographical overlap. The combined company, with a projected market valuation of $72B, will maintain the Westfield brand and REIT status in the US, and will operate malls in premiere markets throughout the US, UK and Europe, including London, Los Angeles, Munich, New York, San Francisco, Stockholm, Vienna, Madrid and Warsaw[1]. The combined company will be the second largest retail real estate company in the world, behind Simon Property Group. Proposed revenue and cost synergies will emanate from branding strategies and salaries as the Westfield senior team is stepping down.

Deal Structure: Shareholders of Unibail-Rodamco and Westfield will hold stapled securities consisting of one Unibail-Rodamco share and one Newco share that will trade as a single security. A Dutch Newco will hold the US assets and Unibail-Rodamco will hold the European assets and services.

Financing: Unibail is financing the transaction through the issuance of Unibail's stapled securities and US$5.6 million in cash. A EUR$6.1 billion bridge facility will be refinanced over time with unsecured senior debt, subordinated hybrid securities and property sales. A plus for the combined entity currently and going forward is the better cost of capital (both equity and debt) in Europe vs. the US.

Credit Perspective: Rating agencies cited the initial pressure on various debt and leverage metrics with the combination, but anticipate improvement over time. An extensive EUR$12.3B development pipeline will allow the combined company to fine-tune offerings and property dynamics over time, but could impact earnings if not completed as projected.

Unibail-Rodamco: S&P affirmed the A-rated unsecured debt rating with a stable outlook. Moody's assigned an A2 issuer rating to Unibail with a stable outlook. Fitch placed Unibail's ratings (issuer rating currently at A) on rating watch negative.

Westfield: Moody’s placed Westfield's A3 issuer rating on review for upgrade and S&P placed Westfield’s BBB+ ratings on Creditwatch positive, which could raise its ratings to A, consistent with Unibail.

Three-Way Split in Retail: Unibail's CEO Christophe Cuvillier, who will be CEO of the combined company, sees a three-way split in the future of retail between the internet, convenience/transport shopping and destination retail. He noted: “We, like Westfield, are destinational...” and said in a statement that the acquisition “is a natural extension of Unibail-Rodamco’s strategy of concentration, differentiation and innovation.”

Busy Week for Retail: Europe’s Hammerson and Intu announced a merger and Brookfield Property Partners bid US$15 billion to buy the remaining 66% of GGP Inc. that it does not currently own.

Is Bigger Better? Some analysts predict that the combined company will be better positioned to withstand the current retail downturn given its heft, but dominance does not address the fundamental issues underlying the downturn, including the accelerating incursion of e-commerce into the brick and mortar turf. At 3Q17, approximately 91% of US retail sales[2] still took place in brick and mortar stores notwithstanding a 15.5% increase in the pace of e-commerce from 3Q16. This progression shows no signs of subsiding as consumers demand value and convenience. In addition, both brick and mortar retail and e-commerce will continue to evolve in response to the shifting shopping habits of baby boomers away from malls and the more minimal shopping habits of millennials that may evolve as they mature.

Ownership Concentration: While concentration of ownership is not always welcomed by tenants, current tenants of Westfield and Unibail-Rodamco properties will not likely experience much of a change in how their properties are operated. One benefit for their retail tenants will be broader access to new markets in different countries. Unibail is also known to have substantially fewer anchor tenants in their malls vs. US malls, which is a formula they might be well served to apply to Newco's US properties to address the decline of some department stores, which have traditionally served as anchors in US malls.

Retail Differentiation: It remains to be seen if the properties of the combined company will retain or increase their appeal as destinations to consumers who are drawn to unique and authentic experiences. The combination may well contribute to the homogenization of global retail, which is already evident on high streets and shopping centers throughout the developed world, or it may enable the combined company to deliver more of what its global consumers need.

Ellen Sinreich, Esq., Partner, The Sinreich Group, provides legal services to the real estate industry.

Merrie Frankel, President, Minerva Realty Consultants, provides REIT and rating advisory services.

[1] Since both companies use international Financial Reporting Standards (IFRS) accounting vs US GAAP, portfolio values are market values vs. book value, which is used in US financials.

[2] US Dept. of Commerce, Quarterly Retail E-Commerce Sales, 3rd Quarter 2017, Nov 17, 2017.

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