Klépierre: Going shopping for malls
French mall owner could scupper Hammerson’s proposed Intu merger if it makes a formal bid
The global retail property sector has been anything but dull of late.
Mega deals among the world’s leading mall owners have been coming thick and fast, with the latest being France-listed Klépierre, which last month made a cheeky play for London and JSE-listed Hammerson.
That follows fellow French heavyweight Unibail-Rodamco’s recent takeover of Australian-based Westfield and the merger between US-focused Brookfield Property Partners and General Growth Properties.
Hammerson, which owns a portfolio of more than 50 shopping centres, retail parks and outlet villages across the UK and Europe, late last year announced plans to merge with UK-focused Intu Properties.
Hammerson’s flagship malls include Bullring in Birmingham, Dundrum Town Centre in Dublin and Les Terrasses du Port in Marseille.
Hammerson’s and Intu’s portfolios are roughly the same size, with a combined value of £21bn (R350bn). If successful, the merged entity would become the JSE’s largest property stock, with a market cap close to R120bn.
Hammerson and Intu shareholders are supposed to vote on the merger within the next three months.
However, Klépierre’s surprise £5bn (R83.5bn) offer on March 19 to acquire Hammerson’s entire share capital has upset the apple cart. While the bid was immediately rejected by Hammerson it caused the company’s share price to jump 26% in one day, suggesting that the market won’t be averse to such a tie-up.
Klépierre’s shopping centre portfolio is valued at ¤23.4bn (R363bn), roughly double the size of Hammerson’s.
Klépierre is generally believed to be a good fit for Hammerson given its large exposure to Western Europe including France, Belgium, Italy, Scandinavia and Iberia.
Hammerson shareholders, of whom around 14% are SA investors, are now waiting with bated breath to see if Klépierre makes another, higher-priced move on Hammerson. Under UK regulations, the French mall owner has until April 16 to initiate a binding offer.
SA fund managers say it is too early to say how things will play out. Hammerson shareholders will probably welcome a firm offer from Klépierre as it would give them an alternative option to the Intu deal, given that the latter does not enjoy widespread support among SA shareholders.
The general view is that Hammerson should steer clear of increasing its exposure to the struggling UK retail market.
Catalyst Fund Managers global investment analyst Tiffany Jones says while a merger with Intu will result in some benefits, Catalyst is concerned about portfolio composition, given Intu’s focus on the UK. "We are wary of the timing of Hammerson looking to increase its exposure to UK assets given the tough outlook for retail in the region and potential downward pressure on asset valuations," says Jones.
Referring to Hammerson’s intention to sell around £2bn’s worth of mostly UK properties from the combined portfolio should the Intu deal be successful, Jones says it may prove difficult for Hammerson to do so at decent pricing levels. "We think Hammerson as a standalone company has some high-quality assets, particularly its premium outlets and Ireland portfolio, and combining these assets with the Intu portfolio is a cause for investor concern."
Jones says Catalyst has mixed feelings about Klépierre’s initial offer for Hammerson as it is possible that the French mall owner’s intention was simply to disrupt the Intu deal.
Though a Klépierre-Hammerson merger will no doubt offer potential synergies and benefits, Jones says Klépierre is not in an ideal position to make a higher bid.
"Klépierre is trading at a discount to NAV of over 20% and has a loan-to-value ratio of around 35% — not the most opportune time to be raising capital," she says.
However, a firm offer from Klépierre would give Hammerson shareholders plenty of food for thought. Jones says shareholders would have to consider which portfolio and/or management team they consider most attractive. "A no vote on both an Intu and a Klépierre offer is also possible," she says.
Investec Asset Management portfolio manager Peter Clark says the market is currently pricing in a slightly higher probability of a formal offer from Klépierre by April 16. If Klépierre’s offer for Hammerson moves forward, Clark believes the proposed Intu deal will fall by the wayside.
"The proposed Intu-Hammerson merger is good for Intu shareholders, but we are not convinced of the merits for Hammerson shareholders," says Clark. He adds that if Klépierre’s offer is priced at the right level, it may be a more attractive deal for Hammerson shareholders.
Keillen Ndlovu, head of listed property funds at Stanlib, agrees that pricing will be a big factor determining the viability of a potential merger between Hammerson and Klépierre.
The latter’s initial cash and share offer, valued at 615p/share, represented a 41% premium to Hammerson’s London closing price on March 16. However, Ndlovu notes that the offer represented a 21% discount to Hammerson’s NAV of 776p/share — a key reason cited by Hammerson’s management on why it rejected the offer outright. Hammerson’s share price is still up around 26% since March 16.
Ndlovu says the fact that Intu’s share price has not moved in tandem clearly suggests that Intu is not part of Klépierre’s plans.
Without debating the merits of a potential merger between Hammerson and Klépierre, Ndlovu says the key message for investors is that mall-focused real estate investment trusts are cheaply valued.
"Moreover, there’s clearly still a case for investing in good-quality malls like Hammerson’s, despite concerns around the rising threat of online shopping and store closures."