Brookfield’s Potential Intu Bid: 5 Things You Need To Know
Last week it emerged that Brookfield had teamed up with U.K. investor Peel Group and Saudi Arabian investor Olayan to consider a bid for Intu, the listed U.K. shopping centre owner with a market capitalisation of £2.6B.
The potential offer is the latest chapter in the Intu saga, which includes the company spurning a £5.75B bid from Simon Properties in 2011, and a deal for Hammerson to buy the company for £3.4B which fell apart earlier this year.
The possibility of an offer from the Brookfield consortium has big implications for both Intu and the wider U.K. shopping mall sector. Here are the key things you need to know.
Is Brookfield The Most Bullish Mall Investor In The World?
Maybe bullish is putting it too strongly, but Brookfield is going where others so far fear to tread: It is the first big private equity firm to decide that shopping mall prices have dropped far enough to justify starting to put significant amounts of money into the sector. In July it agreed to buy the 66% of U.S. mall REIT General Growth Properties it didn’t already own in a deal that valued the company at £15B, and it bought Forest City, a U.S. REIT with plenty of retail, in the same month.
Brookfield Property Partners Chairman Ric Clark explained the firm’s thinking on the GGP deal to Bisnow earlier this year, and he could just as easily be talking about Intu, a firm whose portfolio is seen as in need of intense capital expenditure.
“There’s office space companies talking to malls, there’s experiential retail talking to malls,” Clark said. “There’s going to be a period of capital investment — but ultimately I think these properties will be more valuable. It will just take time and investment.”
Oh John, How Did It All Go So Wrong?
In 2011 Peel Group founder John Whittaker seemed to have pulled off a fantastic deal. He sold the Trafford Centre to Intu (then called Capital Shopping Centres) for £1.65B, still the largest ever deal for a single U.K. property asset. He took a 25% stake in the company instead of cash, meaning he did not have to pay tax on the sale. And he became the company’s deputy chairman — commentary at the time focussed on how he would bring the operational expertise that had made the Trafford Centre a success to the whole of Intu’s portfolio and drive up the value of the company, increasing the value of his stake.
Intu paid for the Trafford Centre in shares valued at 400p. Today the company’s shares are valued at 184p. Even if an offer for Intu reaches 200p, Whittaker is likely to take a hit of £600M to £800M on the value he put on the Trafford Centre in 2011. Maybe he should have just taken cash and paid the tax?
What Does This Mean For The Wider Mall Market?
Shares in mall specialists like Hammerson rose on the news of a potential bid from Brookfield, but it is open to debate as to whether it is good news for the beleaguered shopping centre market.
On the one hand, a deal could be seen as Brookfield calling the bottom of the market and a sign of confidence in the sector. But there is the potential for the deal to be struck at a level much lower than today’s mall values.
“If a deal was done at a deep discount, it may send published private-market valuations into a tailspin,” Green Street Advisors Managing Director Hemant Kotak said.
Big malls of the type owned by Intu don’t trade very often, especially not in portfolios, and investors often argue that means such portfolios should command a premium. If Intu trades at deep discount, it could be taken as proof that the values being attributed to malls by other REITs and institutions are overinflated. The company is currently trading at a discount of about 40% to net asset value.
Is There A Possible Rival Bid Out There?
Probably not. Given that Peel and Olayan own 29% of the stock, it would be very difficult for another group to make an offer the pair would vote in favour of unless it was at a huge premium to the current share price, something which is very unlikely. Hammerson’s shareholders might revolt if it made another bid for the company, and no rivals emerged when it was bidding for Intu.
What Are The Odds This Actually Happens?
“We would expect any reasonable cash offer to be recommended for acceptance by the management,” Stifel analyst John Cahill said. “Intu is fast running out of road with its business model, faced with declining retail rents, tenant insolvencies, company voluntary arrangements, a large capex programme, and a loan to value ratio of over 50%, all framed by the search for a new CEO willing to take on the most difficult job in property.”
Kotak hypothesised a situation where Brookfield offers around 200p a share (the level to which the shares jumped after the announcement of the potential bid), which is rejected by the board, and then an offer of around 220p is accepted.
That would be a 50% premium to Intu’s shares before the announcement was made, a level that the board could accept and still say they got a good deal for shareholders. But it would only be a 15% discount to Intu’s net asset value. Is that a big enough discount for Brookfield to make an acceptable return? Kotak points out it will likely make a 6% ungeared return on its GGP deal, but buying Intu at a 15% discount to NAV would make it hard to hit the same level. If no deal is reached, what does that say about where mall values really lie in the U.K.?
The consortium has until 1 November to lodge a bid.