The release of the independent expert reports for the proposed restructuring of the Westfield property empire represents the decisive moment in the history of the controversial proposal.
Both the reports -- Grant Samuel for Westfield Group and KPMG for Westfield Trust -- endorse the proposed division of Westfield Group into international and Australasian businesses, with the local operations merged with Westfield Retail Trust (WRT) to form a new Scentre Group.
Given the common ownership of the underlying portfolio of retail centres -- KPMG said more than 98 per cent of WRT’s assets are common to Westfield group’s Australian asset base -- there was never going to be much of a debate about the quality or value of the assets being contributed by the two entities to Scentre.
From the moment the proposal was unveiled in December, however, there has been plenty of debate about the value the proposal attributed to Westfield Group’s operating platform in Australasia and the reduction in net asset backing and increase in gearing that WRT security holders would experience if the transaction were implemented.
The two expert reports will be critical in helping the institutional shareholders sceptical about the valuation of the operating platform come to a definitive position on the proposal and could determine whether or not it succeeds.
At a macro level the proposal envisages WRT security holders ending up with 51.4 per cent of Scentre and Westfield Group security holders 48.6 per cent.
KPMG, for WRT, concluded it would contribute between 51.3 per cent and 51.8 per cent of the value of Scentre (the tightness of the range flows from the commonality of the underlying asset base) while Grant Samuel assessed Westfield Group’s contribution at between 48 per cent and 56 per cent, suggesting there is more potential leakage of value for Westfield Group in the transaction than for WRT.
That’s a conclusion mirrored by the sharemarket. Since the proposal was announced, WRT securities have edged up marginally but Westfield Group’s have slipped.
That’s probably because KPMG valued Westfield Group’s operating platform -- its property management, funds management and development activities -- at between $2.8 billion and $3bn whereas Grant Samuel valued it at between $3bn and $3.5bn.
KPMG discounted the platform’s project management income (because of its variability) in coming up with its maintainable earnings before interest and tax of $216.5 million for a platform that generated about $295m of EBIT last year.
It also solved the mystery of the disappearing net assets -- the platform is held as an asset within Westfield Group but, because Scentre isn’t going to be treated as the acquiring entity for accounting purposes, it won’t be treated as an asset within its balance sheet.
There is strong logic to the splitting of the Westfield group into international and domestic vehicles and in the consequential merger of the two arms of the Australasian business, given their different geographies and risk and maturity profiles. It is the detail of the terms of the separation that has caused investor angst.
It should be clear shortly -- after the institutions and analysts have had the time to properly digest the detail of the independent reports, come to their own conclusions and compare the outcomes to the status quo -- whether the reports are sufficiently convincing to get the proposal across the line.