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Retail giants shop for UK property

For shopping centre owners, Christmas has come early. The world's largest real-estate investment trust (Reit), $30bn US giant Simon Property Group , is poised to table a takeover bid for UK Reit Capital Shopping Centres , a move that has created ripples across the whole property sector.

Simon acquired a near-6 per cent stake in CSC, the owner of UK shopping malls including Lakeside and the Gateshead MetroCentre in 2008. Until now Simon has been a silent investor. The event that triggered its surprise bid request last Thursday was CSC's audacious deal to acquire the fourth-biggest retail asset in the UK - Manchester's gargantuan Trafford Centre, developed by 68-year-old property tycoon John Whittaker, the secretive chairman of the Peel Group.

As the US shut down for the Thanksgiving holiday last week, Simon requested that CSC postpone a £216m placing to finance the deal until it could make "a potential cash offer for the company at an unspecified premium to NAV".

Regardless, CSC successfully proceeded with the raise. At the time of going to press, no firm offer has emerged from Simon, but CSC's shares have jumped 18 per cent to 402p, trading at a 7 per cent premium to NAV. Simon has a theoretical deadline of 20 December (the AGM vote on the Trafford Centre transaction) but until then, bid speculation could drive CSC's share price higher still.

Analyst Mike Prew at Nomura speculates that an offer at a 20 per cent premium to NAV could be forthcoming (a bid price of 450p a share, which may tempt many investors to have a punt). He has praised CSC's initiative to acquire the £1.6bn Trafford Centre by using its own equity (CSC will issue 167.3m new shares and £209m convertible bonds to the Peel Group in exchange for the asset and £798m of debts secured on it. This equates to Peel taking a near-20 per cent stake in the enlarged company, or nearly 25 per cent assuming conversion of the bonds).

If voted through, Mr Whittaker will have a controlling stake in CSC, and get a seat on the board as deputy chairman. Symbolically, he would usurp former chairman Donny Gordon and the Gordon family as the largest shareholder, so it is hardly surprising that the move has flushed out a "now or never" bid approach from Simon (interestingly, the Gordon family are supportive of the Trafford Centre acquisition). The next question for investors to mull is, could a bid also be forthcoming from Westfield ?

The Australian listed shopping centre giant acquired a smaller stake in CSC virtually the same week as Simon did, although it holds less than 3 per cent of the shares. Last week, Westfield sold down a 50 per cent stake in its Westfield Stratford mall adjoining the 2012 Olympic site for £871m. Combined with the proceeds of a wider asset restructuring scheme, it has up to Aus$5bn of firepower.

Intriguingly, Westfield and Simon have jointly bid for retail rivals before now, with a failed 2003 takeover attempt of US developer Taubman Centers in 2003. But hopes of a bidding war in the UK Reit sector has caused a wider positive shift in sentiment, with fellow Reits Land Securities , British Land and Hammerson all seeing the Christmas shopping spirit lift their share price.

Even if no takeover bid is forthcoming, pulling off what will be the biggest single-asset transaction in UK property history will still be a coup for CSC. Since the stakebuilding, the lurking bid premium has made its shares look expensive compared with other Reits, and the news has helped justify . The bounce in its share price could not have been better timed - CSC will now remain a FTSE 100 constituent upon the next test on 7 December, adding further support to the share price. If the Trafford deal is approved, CSC will own 14 out of the top 25 UK shopping centres, and its weighting towards out-of-town retail assets will increase to 64 per cent of its portfolio, up from 52 per cent.

However, M&A mania has deferred criticism of the £1.6bn acquisition, which many believe is too fulsome a value. JP Morgan real estate analyst Harm Meijer says this is "a fair price, but not a bargain" noting that 21 per cent of rental contracts expire in 2013. As the dominant centre in the north-west, this might not be a problem. However, Zone A retail rents of £400 per sq ft means there is not much hope of rental growth.

Perhaps the most surprising factor in this deal is a return to a public role for Mr Whittaker, who famously took Peel private in 2004 with help from powerful Saudi investors the Olayan Group. Mr Whittaker also holds a near-4 per cent stake in Land Securities , and is behind the consortium that controls a 23 per cent stake in Forth Ports . By using his biggest asset to leverage a non-executive role in a FTSE 100 company, he will effectively run the show at CSC. This will be a boon for investors - the placing will enable much-needed capital expenditure on CSC's assets, and his shrewd approach to retailing will doubtless pay dividends in the future. But if investors are betting on this outcome, wait until after Christmas before you shop for shares. If Simon's interest wanes, the shares will get a lot cheaper.

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By Claer Barrett,
01 December 2010

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