The Westfield split – For and Against

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In favour of the Yes vote – Charlie Aitken Charlie Aitken, Switzer Super Report expert

In recent times I have had questions from retail investors and their advisers about the Westfield split proposal. Today I thought I’d simply put my thoughts on paper ahead of the Westfield Retail Trust “re vote” on June 20.

Firstly I want to make it very clear that myself and Bell Potter have absolutely no role in this Westfield transaction. We shall receive no fees from any outcome. Our only interest is that Bell Potter clients hold around 25 million Westfield Retail Trust (WRT) shares and 40 million Westfield Group (WDC) shares.  I think it’s important we have an independent view on this large transaction, which potentially has short, medium and long-term ramifications for both Westfield Retail Trust and Westfield Group shareholders.

In my view this Westfield Group/Westfield Retail Trust asset split/simplification always had merit. The recent Westfield Retail Trust meeting failed by a fraction to get shareholder approval, yet 74.1% of shareholders who voted, voted in favour of the transaction. On the Westfield Group side 98% of shareholders voted via proxy in favour of the deal. Those results are somewhat surprising considering it is estimated around 60% of shareholders hold both stocks. You’d think most investors would vote the same way on both sides, but in this case a very public campaign by the ASA and a couple of institutional investors saw the first Westfield Retail Trust vote just fail to get the required 75%.

Get over the apathy

Individual Westfield Retail Trust shareholder apathy clearly played a role in the first vote failing to get the required 75%. Of the nearly 100,000 individual Westfield Retail Trust investors only around 9,000 physically voted on the deal. This is a very important point because what happened at the first vote suggests retail investors being apathetic, yet controlling 10% of the company, actually are holding the cards in this situation.

One thing I must stress to our Westfield Retail Trust individual investor shareholders is you need to lose the apathy quickly. Now that the Lowys have revealed the intention to execute a “Plan B”, which would mean Westfield Retail Trust shareholders being left on their own, I think it’s very important all Westfield Retail Trust retail shareholders read the Westfield Retail Trust second supplementary security holder booklet and the views of the Westfield Retail Trust independent directors. I also think it’s very important you vote because the share price results of apathy could be quite different from the first meeting.

The alternatives

Let me illustrate the two potential alternatives.

Plan A sees 100% of the international assets in Westfield Corporation and the Lowy Family owning 8% of Westfield Group. 100% of the domestic/NZ assets are in Scentre Group with the Lowy Family owning 4% of Scentre Group.

Plan B potentially sees 100% of the international assets in Westfield Corporation and the Lowy Family owning 8% of Westfield Group. 50% of the domestic/NZ assets would be in Newco with the Lowy Family owning 8% of Newco. The other 50% of the domestic/NZ assets would be in Westfield Retail Trust with Westfield Retail Trust paying a management fee to Newco (potentially hundreds of millions pa). The Lowy Family would own 0% of Westfield Retail Trust.

In my view Plan B would make Westfield Retail Trust very difficult/almost impossible to takeover, yet Plan A makes both Westfield Group and Scentre Group clean potential takeover targets in the future. That is also a point worth considering. Plan A also sees Scentre Group enter the ASX20 Leaders Index (XTL) and all the broad index money/ETF money support that brings.

I don’t think Westfield Retail Trust shareholders “going it alone” with 50% of the domestic asset base and a management agreement with “Newco” is a good idea. It would also mean the Lowy Family had no direct interest in Westfield Retail Trust shares which would be far from ideal as they have nothing to lose and everything to gain by ramping up those management fees to Newco. I suspect some of the independent Westfield Retail Trust Board members would resign too after recommending the deal, while neither Newco nor Westfield Retail Trust in this form would be members of the ASX20 Leaders Index (XTL). That is the alternative Westfield Retail Trust shareholders face if the 2nd vote fails to get 75%.

It’s fair to say the independent directors of Westfield Retail Trust realise this is a material change from the first proposal. It clearly increases the share price downside risk of a no vote and puts Westfield Retail Trust in a strategic bind corporately.

At the second Westfield Retail Trust shareholder vote on June 20 you are faced with a very clear choice: a future with the Lowy Family or a future without the Lowy Family.

For all the institutional noise about valuations, merger ratios, advisor fees, gearing levels, development pipelines and management agreements that institutional investors quibble about, the simple summary of the situation in this 2nd Westfield Retail Trust vote for retail investors is if you want the Lowys with you?

Clearly in my mind and through history that question answers itself. And to me, it’s the ONLY question that needs answering and voting on.

I encourage all Westfield Retail Trust shareholders to vote either via proxy (by 18th of June 10am) or at the meeting on the 20th of June. In this case the all too frequently used words “your vote is important” are extremely accurate. You, the individual shareholders of Westfield Retail Trust will decide this outcome.

My advice is to vote “yes”, stay aligned to the Lowy Family and the Westfield management team, and then hold on for the day in the future when both Westfield Group and Scentre Group are taken over at significant premiums to NTA.

Frank-ly, you should give a damn

100% of Charlie Aitken’s fees for writing for the Switzer Super Report are donated to The Sydney Children’s Hospital Foundation.

In favour of the No vote – John Pearce 

John Pearce is chief investment officer of UniSuper and looks after nearly $40 billion for over 450,000 members in the higher education and research sector super fund. UniSuper’s growth option has returned 16.04% for the financial year to date as at June 10 and the high growth option 17.59%.

In response to the argument that institutional investors vote or act differently to retail investors, Pearce stresses that “we are representing retail investors” and all investment decisions are made in their best interests.

His publically stated view is that the proposal is not in the best long-term interests of investors. Pearce and UniSuper were relatively quiet about their position until the first vote on May 29.

“I think the events of May 29 changed that for us because…at the meeting shareholders were basically being warned if they don’t vote for this they are going to be up against this really competitive vehicle [Newco],” he explains.

“We basically want to balance up the discussion a bit,” he says.

Pearce does not believe Newco would be a big competitor as it would be “debt-laden” and would operate under the same competition restrictions around buying more shopping centres that Westfield does.

Pearce also points out that if the entities were two totally independent companies – and didn’t have the same level of common ownership that Westfield Retail Trust and Westfield Group have – the vote would have got no where near the 74% in favour on May 29.

“I think we are blurring the real picture,” he says.

The following is an edited extract from a June market update UniSuper sent to members.

Why are we rebelling against the proposal?

At a high level, one can see that Scentre is a fundamentally different proposition to WRT. We bought into WRT because it was a lowly geared landlord, earning steadily growing rental streams, which ultimately convert into growing dividends.

Scentre has much higher levels of gearing, and also adds risk associated with property development management fees. In simple terms one could say we bought an apple, and now we are being asked to accept an orange.

Since the time of our initial investment, we have been very clear in our communication to WRT management in relation to corporate strategy.

The other major sticking points for us revolve around cost and price. The big winners from restructures are invariably the lawyers, bankers, and other ‘experts’ and this proposal is no exception, with the bill estimated to be around $75 million plus a further $350 million of refinancing costs. WRT will therefore be asked to pick up a huge tab for something we didn’t want in the first place.

The difference between the proportion of assets WRT is contributing to Scentre (69%) and the ultimate ownership (51.4%) is effectively payment for management rights that WDC will relinquish to Scentre. The independent expert has deemed this to be a fair price, but we strongly disagree. The valuation ascribed by the independent expert implies a level of property development management fees, in perpetuity, which we simply cannot reconcile. The property experts we speak to agree. Suffice to say that we are far apart in terms of fair valuation.

In our view this deal simply represents a transfer of value from Westfield Retail Trust (WRT) to Westfield Group (WDC).

The extraordinary events of 29 May 2014

The meeting itself provided an extraordinary twist to the story. The proposal was destined for defeat because, in our view, there were insufficient votes on-the-floor to change the outcome from the proxy votes lodged before the meeting. That is, until the chairman made the extraordinary decision to postpone the meeting. The reason given was that information presented by Westfield Group chairman, Frank Lowy in the morning was deemed to be new information, and that this new information was material. In the chairman’s view, the information was considered material enough that Westfield Retail Trust investors would need more time to consider their decision, or indeed change their decision if they had already voted.

The new information appears to have been Westfield’s ‘Plan B’, in the event that the proposal was not approved by security holders. Plan B involves the establishment of a new company (for this update let’s call this ‘Scentre B’) housing the Australasian assets spun off by Westfield Group. Furthermore, it was made clear to members that Scentre B would be a very attractive company competing with WRT (the “ugly sister” according to one journalist) in the marketplace for capital and assets. In other words it could be viewed as a thinly veiled warning to potential ‘against’ voters.

We hope that WRT security holders see through this. In our view, Scentre B [now known as Newco] will not be the attractive sister to WRT – indeed we think quite the contrary. Scentre B, after incurring the costs of a restructure, will be highly geared and be forced to sell assets as investors demand lower debt levels. This would in itself be a great outcome for WRT given that it has pre-emptive rights (i.e. first right of refusal) to purchase the properties.

The bottom line is that we are not at all concerned about the so-called ‘Plan B’. Under this scenario WRT will continue to be the attractive, lowly geared, rent collecting landlord we bought in the first place. Therefore our response to Plan B is: “bring it on”.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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