Mega Mall Merger: French Bid For Westfield Creates $72BN Mall Giant As Online Threat Looms

The need for consolidation in the face of the ongoing Amazon - and broader online menace - is becoming irresistible, even for the biggest and best mall operators. Today the French-based Unibail-Rodamco, the biggest commercial landlord in Europe, agreed to purchase Westfield, the Australian-based mall operator. Unibail is offering 0.018844 shares and $2.67 cash for each Westfield share – a 65/35 stock/cash ratio – which values Westfield at an enterprise value of $24.7 billion. Westfield owns 35 shopping malls in the UK and US and is building a new mall in the Italian city of Milan. It ranks as the biggest private sector mall owner in London and the twelfth largest in the US.

If successful, the deal will be the largest takeover in Asia Pacific this year and the largest ever in Australia. It is also the largest transaction in the real estate sector, since Lehman Brothers Holdings sold an apartment ownership company for $16 billion in 2013.

The decline and restructuring of the shopping mall sector is something we’ve been following closely, for example, in the series “Dead Mall Stalking – One Hedge Fund Manager’s Tour Across Middle America”, in part 1, part 2 and part 3.

In October, we noted with incredulity the logic-defying strategy of General Growth Properties.

So what do you do when your business has entered a period of secular decline due to changing consumer trends which has created an environment of massive oversupply and no pricing power?  Well, if you're the once-bankrupt commercial REIT, General Growth Properties (GGP), then you build a brand new $525 million mega-mall and make the problem even worse. 

Fortunately the combination of Unibail and Westfield, which will create the global leader with 104 properties, makes strategic sense. Indeed, the deal fits with Unibail’s strategy of high-grading its portfolio in recent years. The company has been divesting its smaller and less dominant properties across Europe, reinvesting the cash in larger malls which it hopes will be more resilient to the growth of online shopping. The plan to sell 3 billion euros worth of European malls will be unaffected by the Westfield transaction. Bloomberg Intelligence analyst, Sue Munden, who we know as a sensible commentator on the commercial property sector, had this to say on the deal.

“This is a combination of two of the best-in-class mall operators in the world…They will become a dominant player, have the best relationships with retailers and therefore be best placed to create the malls of the future.”

According to Unibail’s CEO, Christophe Cuvillier, "The acquisition of Westfield is a natural extension of Unibail-Rodamco’s strategy of concentration, differentiation and innovation…It adds a number of new attractive retail markets in London and the wealthiest catchment areas in the United States."

Unibail stated that the deal should lead to annual synergies of 100 million euros per year and will be earnings accretive in the first full year of consolidation. Speaking to Bloomberg, one analyst thinks Unibail is overpaying.

“Our first take is that we are not over-excited about the price -- Unibail is buying at an implied initial yield of below four percent,” said Peter Papadakos, an analyst at Green Street Advisors in London. “If you think about where cap rates and yields are going in the U.S. and the U.K., which we think will be stable to upwards, the pricing is aggressive.”

Westfield was founded in 1959 by Frank Lowy, now billionaire Sir Frank Lowy, with one shopping mall in Sydney suburb. The Lowy family will retain a shareholding in the enlarged group. The group was split in 2014 with the UK and US assets retaining the Westfield name, while the Australia and New Zealand assets were spun-off into Scentre Group, listed on the Australian Stock Exchange.

Quoted by the Financial Times, Sir Frank said “we started small but we took Westfield to the world,” adding it was the right time to sell given Unibail-Rodamco were offering a good price to shareholders, and given the pressures in the global retail industry… Sir Frank said his family, including his sons Peter, Steven and David who have all worked closely with him, wanted to change their roles in the world by moving from being executives to becoming investors.

Lowy Senior,, now 87-years old, will chair a newly created advisory board in the merged company. Given the success Lowery had in building his company and the timing of his sale, we suspect that Unibail will benefit from his retail savvy going forward. They might need it. We get the Unibail strategy of creating a global leader with malls located in the “best” cities, as strategies go in this sector, it’s probably the only one that has a chance of success given the strategic challenges. Nonetheless, it’s not going to be easy, as even Unibail’s CFO Jaap Tonckens acknowledges.

“We’re going into London, we believe it’s a global city and will be fine” despite the slowing U.K. economy, Tonckens said. “Will it be choppy? Probably.”

Yet for all the giant numbers in the tens of billions floating around this, Jeff Bezos has one phrase that summarizes them best: pocket change.