Experts in the retail and equities/finance markets have their say on the Hammerson-Intu megamerger
James Carswell and Matthew Saperia, Peel Hunt
The boards of Hammerson and Intu Properties have agreed on a recommended all-share offer, with Intu shareholders receiving 0.475 new Hammerson shares for each share, representing a 27.6% premium to yesterday’s closing price.
The combination will look to dispose of at least £2bn of assets, and reduce costs by £25m pa after two years. The implied discount to our Intu December 2017 NAV forecast of 389p is around 35%, reflecting a small premium to Hammerson’s current NAV rating of 32%.
The key benefit to this transaction, we believe, will be earnings accretion, which will need to be weighed up against the potential for asset quality dilution for Hammerson shareholders.
Mike Prew and Andrew Gill, Jeffries
Hammerson and Intu boards have agreed a recommended all-share offer by Hammerson to acquire the issued capital of Intu. This highlights that no matter how prime a REIT claims its assets to be, much depends on its capital stack, and that means its level of gearing as well as its structure.
Once the 42.5% sale of the stake in Bluewater prints (Landsec has already marked its share down by 5% along with the St David’s Centre in Cardiff) probably in the first half of 2018, we believe the shopping centre market is likely to crack in valuation terms with this subordinated stake with an evergreen management agreement with Landsec.
That’s worse news for Intu than Hammerson owing to Intu’s bond structure, which is a yoke around the Intu management’s neck. As gearing creeps above 50% (June: 47%), the business is restricted in asset transfers in an out-of-the-security pool and its ability to deploy development capex, the lifeblood of any real estate business.
Lower gearing is Hammerson’s leverage in this transaction. That company will comprise 55% of the merged entity and its board will run the combined group and get naming rights. Intu’s 47% gearing is excessive (compared with Hammerson’s 40% in H1 2017) and Hammerson’s estimated merged gearing ratio is 41%. We would assume Hammerson’s dividend yield on the enlarged group is 4.8%.
The disappointing aspects? No cash alternative, and the year to completion will likely see significant anti-trust hurdles to overcome.
How does this leave the sector?
This is not a cash bid for a high-quality UK REIT by an overseas buyer, which would trigger a re-rating of the sector, but a coalition of weak business models, with 25% Intu shareholder Peel Holdings preferring to take its chances with Hammerson management (and diluted to 15% of the enlarged group) and greater liquidity in the shares.
Hammerson has irrevocable undertakings or letters of intent from Intu shareholders, including Peel and the Intu directors, to vote in favour of a transfer of 685,220,682 Intu shares, representing 50.6% of Intu’s issued share capital.
So the deal will happen and give the UK a mega-mall REIT. The enlarged group will have a £21bn portfolio (Unibail’s is £37bn) but the interesting high-growth areas are Intu’s Spanish business and Hammerson’s designer outlet centres.
Sofie Willmott, senior retail analyst, GlobalData
The deal announced this morning between Hammerson and Intu will give the combined group a stake in 12 of the 20 supermalls in the UK – supermalls being large shopping centres larger than 20m sq ft that attract 20m+ visitors annually, including Birmingham Bullring, Intu Trafford and Manchester Arndale.
Dominance in the location will bolster the group’s negotiating power with both retailers and leisure operators, helping to create destination shopping centres with all-round appeal, enabling the group to better compete with experience-focused Westfield, which has set the bar high.
Although the group plans to sell £2bn of assets to improve its balance sheet, these are unlikely to be the all-important supermalls, considering that retail spending is set to rise by 7.2% in these locations over the next five years, outstripping growth in physical retail forecast at 5% (across non-food sectors), according to GlobalData’s forecasts.
We expect the combined group to prioritise supermall development, and enhance the locations to appeal to shoppers looking for product and retailer choice alongside an exciting food service and leisure offer.
As clothing and footwear retailers focus on supermalls to create large-scale, experience-led stores, physical retail spend will move away from town centres towards destination shopping centres, ensuring supermall space is hot property. The proposed deal will net the group a stake in almost 60% of all UK supermall space, making it a force in the retail landscape, well placed to benefit from retail spend shifting across locations.
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