MAGAZINE Mega retail merger draws near

At end-March Unibail-Rodamco, Europe’s largest shopping centre landlord, received the green light to take over Sydney-listed peer Westfield by the Australian competition authorities. Euronext’s independent review board has meanwhile confirmed the new group is eligible to be listed on the CAC and AEX indices in Paris and Amsterdam respectively.

The deal, which was unanimously recommended by Westfield’s board of directors as well as by Unibail-Rodamco’s management board, remains subject to the approval of Unibail-Rodamco shareholders and Westfield security-holders at the shareholders’ meeting in May.

Unibail-Rodamco’s Dutch-born CFO Jaap Tonckens has no doubt that the company’s shareholders will give the merger the green light. ‘This deal will go ahead,’ he told PropertyEU in an exclusive interview.

The shareholders don’t appear to be enthusiastic: Unibail-Rodamco’s share price has come under pressure since the announcement.
‘The share price did indeed fall by 5.6% between the announcement on 12 December and 9 January. But that was in line with expectations given the number of new shares that will be issued. Since 10 January, our share price has moved in tandem with other property stocks on the whole. ‘The increased possibility of interest rate increases in Europe has somewhat diminished investors’ perspective on real estate.

Other stocks like Deutsche Wohnen and Vonovia have shown a comparable price development. It’s interesting to make a comparison with 2007 when Unibail acquired Rodamco. The Unibail share lost 15% of its value within a month. A lot of the critical questions asked at the time are being asked again. But we have proven in the meantime that our strategy has worked. We have been able to outperform the market. We will do the same with Westfield.’

Are investors concerned that ‘big is beautiful’ is the only argument for the takeover?
'Scale is absolutely not an argument for the Westfield acquisition. We want to enable Unibail-Rodamco to flourish. That is possible with Westfield, because it is a fantastic group with two top shopping centres in London and one high-level development in Milan.’

But Unibail-Rodamco doesn’t need Westfield for Europe, does it? Unibail-Rodamco is by far market leader. The takeover gives Unibail-Rodamco a swathe of US shopping malls which is a concern for some market analysts.

I’m familiar with the criticism. That’s why I want to tell my story where I can, the story about retail of the future, but with statistical evidence from today. Take a company like Amazon: a fantastic web store that now has nine large brick-and-mortar stores, four of which are in Westfield malls. Why do they do that? Look at the online eyewear store Warby Parker. That company is also opting for a physical store.

The same is true of other webstores. They all want direct contact with their customers to give them a complete experience. But then at the busiest locations that attract the highest levels of consumer spending. We will serve 1.2 billion visitors a year in the future. The physical store supports the internet concept. It is simple: with Amazon as a prime member I get prime pricing in the physical store so the customer is happy. At the same time, Amazon makes more money on the bottom line because it spends less on postal costs and returns.’

You talk about the advantages of the Westfield team, but at the same time you are planning to cut costs. How do you justify that?
'That’s a valid question. The answer is simple. The top six executives at Westfield together earn more than $35 mln annually. They will step down, but the senior operational management will stay on and take an important position in the new management structure at Unibail-Rodamco.

I will be able to provide more information about this after the takeover is approved next month. Westfield’s head offices in the United States and United Kingdom will be retained, in addition to our current headquarters in Paris and Amsterdam. Westfield also still has its original head office in Sydney but that is not included in the deal.'

The Westfield takeover will make Unibail-Rodamco a formidable international player, but the company does not have activities in the fastest growing markets – China, India, Taiwan and South Korea. Is that the next step?
'No. A few years ago we were asked whether we wanted to enter the fast-growing Turkish market and recently I was asked whether we wanted to start a mall in China. We’re not doing that, because our risk/return criteria are not met in those countries. You need to understand that the basis of our success is a combination of exclusive ownership and internal management. Only then can we offer our retailers added value.

Shopping centres that meet the expectations of the future require investments of between €500 mln and €1 bn. You can only take that sort of risk in very mature markets. We can’t make the numbers work for these countries. Our conclusion is that local players need to set the pace in emerging economies like Dubai and China.'

Since the takeover announcement you have held a large number of road shows. What was the biggest challenge for you: convincing equities analysts or institutional investors?
'I don’t see either as a problem. Both understand the rationale. There is also an explanation for the fiscal issues. To ensure that shareholders in the new group don’t experience any fiscal advantages or disadvantages from the transaction, a Newco will be listed on the Amsterdam stock exchange, the name of which will be announced shortly. The Newco shares will be linked to the Unibail-Rodamco shares in Paris and Amsterdam and there will also be a listing in Sydney.

Every existing Unibail-Rodamco share includes Newco and will be traded as a single share. Contrary to what has been suggested, this is not a new construction, it was also used in Europe for the Eurotunnel and Fortis. Westfield itself also has a so-called stapled security in Australia, comprising three trusts. You need to explain it, but the problem disappears quickly after that.'

What is the biggest challenge?
'Getting the best out of both companies after the takeover.'

Will you play a specific role in that process given your American background and your knowledge of the problems that Rodamco experienced with the French integration?
'I wasn’t around when Unibail and Rodamco merged, but of course I have heard a few things about it. It’s certainly not our intention to send a group of French employees to the US to tell them how to manage their shopping centres. I am convinced that together Unibail and Westfield will become an even bigger leading player than they are now.'

Westfield and the Lowy family
Australian shopping centre giant Westfield is synonymous with Frank Lowy, the colourful founder of the company and the biggest mall developer in the world. Following the hostile takeover of Rodamco North America in 2001, Westfield held a number of large malls in the US. Westfield’s further development in recent years has focussed on the US and to an even greater extent on Europe, under the leadership of Frank’s sons Peter and Steven Lowy.

Unibail-Rodamco CFO Jaap Tonckens met Peter Lowy for the first time at an investor relations conference in 2012. ‘We have been analysing the possibility of a takeover of Westfield since 2014, when Westfield spun off the Australian business as a separate entity,’ Tonckens told PropertyEU.

The Lowy family is keeping its home market outside the deal with Unibail-Rodamco. Unibail-Rodamco was always very familiar with the US branch of the Westfield business as the portfolio contains shopping centres that used to belong to Rodamco. Asked why the takeover process took more than three years, Tonckens explained: ‘The world has changed. We asked experts to conduct an extensive analysis of the case for us. McKinsey, for example, carried out a comprehensive study. Moreover, such a decision required the approval of the company founder, Frank Lowy. Then we had to perform due diligence studies, the extent of which were unheard of in the world of real estate.’

If the takeover is approved – and there are no signs that it won’t be – the ties with the founding family will not be severed altogether. The Lowy family will keep its Australian shopping centres and Peter Lowy will join the board of directors of the new American-French Unibail-Rodamco. One thing is certain: the company will never be the same again.