Retail mega-merger is not about scale, says Unibail-Rodamco's Tonckens

Unibail-Rodamco’s announcement in late 2017 that it was taking over Westfield’s US and European mall portfolio was greeted with a lot of enthusiasm, but also some scepticism.

Tonckens remains confident, predicting: 'This deal will go ahead.' He is also not phased by the recent decline in the company’s share price, which has continued its downslide in the last two months, despite a better-than-expected earnings performance in 2017, and was trading more than 15% lower in the last week of March.

Share price
Tonckens says the initial 6% share price fall was in line with expectations given the number of new shares that will be issued for the transaction. But since mid-January, the company’s share price has moved in tandem with other property stocks on the whole, he argues.

'The increased possibility of interest rate increases in Europe has somewhat diminished investors’ perspective on real estate,’ he says. 'Other property stocks like Deutsche Wohnen and Vonovia have shown comparable share price developments.'

He points out that Unibail-Rodamco shares fell 15% in just one month in 2007 following the announcement that it was acquiring Rodamco.

'A lot of the critical questions asked at the time are being asked again now. But we have proven in the meantime that our strategy works. We have been able to outperform the market and we will do the same with Westfield.'

Both institutional investors and equities analysts understand the rationale for the merger once it is explained, Tonckens adds. ‘We also have an explanation for the fiscal issues. 

‘To ensure that shareholders in the new group are not subject to any negative, or positive, fiscal impact from the transaction, a “Newco”, the real name of which will be announced shortly, will be listed on the Amsterdam stock exchange.

'Newco shares will be stapled to the Unibail-Rodamco shares in Paris and Amsterdam and there will also be a listing in Sydney. Every existing Unibail-Rodamco share will include Newco and will be traded as a single share.’'

This is not a new construction, he adds, pointing out that it was also used in Europe for Eurotunnel and Fortis: ‘Westfield itself also has a so-called stapled security in Australia, comprising three trusts.’

Scale is not an argument
Asked whether investors may be concerned that ‘big is beautiful’ is the key argument for the takeover, Tonckens insists that economies of scale is ‘absolutely not’ an argument for the Westfield acquisition.

‘We want Unibail-Rodamco to flourish. That is possible with Westfield, because it is a fantastic group with two leading shopping centres in London and one high-level development in Milan.'

While the Westfield centres in Europe are indeed top-of-the-bill destinations, some market analysts contend that Unibail-Rodamco does not need Westfield for Europe as it is already by far the market leader in this part of the world. 

Moreover, the takeover gives Unibail-Rodamco a swathe of US shopping malls which may be more of a concern than a blessing given the high level of retailer vacancies in that country and alarmist noises there about a retail ‘armageddon’.

Tonckens acknowledges the criticism and says that is why he wants to tell his story wherever he can, the story about retail of the future, with statistical evidence from the present. 'Take a company like Amazon: a fantastic web store that now has nine large bricks-and-mortar stores, four of which are in Westfield malls. Or the online eyewear store Warby Parker, which is also opting for a physical store.

'And there are others. They all want direct contact with their customers to give them a complete experience, but at the busiest locations that attract the highest levels of consumer spending.

Bricks-and-clicks
'The physical store supports the internet concept. It’s simple: with Amazon, prime members get prime pricing in its physical store so the customers are happy. At the same time, Amazon makes more money at the bottom line because it spends less on postal costs and returns.'

That said, on an operational level, there is not much that Unibail-Rodamco can learn from Westfield given its own established and widely recognised expertise in this area. But although Unibail-Rodamco is a trendsetter in operations, Westfield develops the best shopping malls in the world, Tonckens notes: 'That is an expertise that they add.'

He cites an example: 'When we had an opening at our Centro mall in Oberhausen recently, we flew in a local film star. Westfield flew in Lady Gaga for an opening in London. When you see that you think: we should have had her! We need to become more ambitious. That is our vision: making a difference in terms of the experience in our centres.'