Simon Property Group this week turned the page on the current chapter of the Capital Shopping Centres takeover saga, although the story that began back in November is far from over.
The upcoming extraordinary general meeting to vote on CSC’s £1.6bn acquisition of Manchester’s Trafford Centre from Peel Holdings is “likely to be epic”, according to broker Peel Hunt.
Further action from SPG somewhere down the line has not been ruled out – options include leading a revived offer, participating in a fresh takeover proposal, or exiting its equity position in CSC altogether.
Meanwhile CSC has declared its NAV should be 625p per share – up from its current level of 390p per share. Shareholders and spectators alike will watch its progress with interest.
Peel Hunt’s Keith Crawford and Matthew Churstain:
On Tuesday, the US giant SPG walked away from its bid for CSC, having initially indicated 425p in cash, subject to conditions including proper due diligence of CSC.
Our stance has been, do not take on [CSC founder and shareholder] Donald Gordon – and it remains right.
The shares never exceeded 425p during the past few months and are now shading.
CSC pulled out the stops, creating a potential rather than actual NAV, half as much again as historical, adding up to 625p a share – and dubbed “wishful thinking” by the SPG faction, which owns 5% of the equity.
A large part of this increase has been quantified by CSC’s valuer, DTZ.
SPG landed two strong blows – effectively removing the immediate NAV dilution from CSC’s issue of stock to Peel for the giant Trafford Centre, now a diluted 23.2% at 400p a share versus the earlier 368p, although not gaining the premium price for effective stake control it wanted.
Second, SPG underlined the oddity of one price for a property vendor, and another and much higher sought from a corporate bidder. Founder Gordon and his South African supporters will tend to win the NAV argument, although the shares will backtrack without an effective bid – to, maybe, 360p to 385p.
SPG has kept all options open and may just as likely buy or sell its stake in CSC. The EGM to approve the likely acquisition of the Trafford Centre, on 26 January, is likely to be epic.
Oriel Securities analyst Charlie Foster:
Ahead of Wednesday’s put up or shut up deadline, SPG announced that it did not intend to make an offer for the entire share capital of CSC.
The shares have been buoyed by the bid speculation and there is material downside risk from the 2% premium at which they trade against our CNN NAV per share estimate (381p) with 3.8% dividend yield.
We reinstate our sell recommendation and expect the shares to come off by around 10%. It will be interesting to see whether SPG reduces its stake of around 5%.
The Trafford Centre acquisition uncertainty continues. This may create continued support for the shares. While we support the principle of acquiring the Trafford Centre to improve the overall quality of CSC’s portfolio, the price is full (circa 5% initial yield) and it will be a challenge for CSC to secure sufficient knock-on positives across the rest of its portfolio.
Our sell recommendation is based on concerns as to the sustainability of CSC’s asset valuations in a market where further yield shift is unlikely and rental value risks remain on the downside.
From a macro view, it appears simple to see the appeal of CSC for the scale and quality of its shopping centre portfolio. CSC (assuming the Trafford Centre acquisition) owns 10 of the top 25 UK centres. CSC is market leader and quite rightly attracts and retains long-standing investors looking for UK shopping centre exposure.
From a micro view, the picture is much more challenging. While there is a fair consensus that the best shopping centres will continue to succeed, irrespective of foodstore or internet challenges, it is illuminating to see CSC’s own analysis of the comparative unit shop sales densities pre and post the Trafford acquisition.
The addition of Trafford increases the overall CSC group (unit shop) sales densities by 13%. On the one hand, this flags the real strength of Trafford, but implies that the existing CSC portfolio is performing at materially weaker trading levels. If Trafford is around 25% of the enlarged group, this implies CSC’s unit shops are trading at around 50% lower sales densities.
The acquisition of Trafford would add considerable potential to CSC; it is the extent to which its qualities can be replicated that remain uncertain.
