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Analysts cheer Unibail-Rodamco's Westfield deal, expect boost to US prime malls

Unibail-Rodamco SE's takeover of prime mall owner Westfield Corp. is a good deal for all parties, and it should firmly establish the subsequent combined company as the global leader in retail property in its markets, industry observers said. The transaction between the two companies, with Unibail based in Paris and Westfield based in Sydney, Australia, also has the potential to boost the prices of premier malls in the U.S., where Westfield has 31 assets.

The $15.7 billion buyout creates one of the largest listed landlords in the world, with a gross market value of €61.1 billion across 104 shopping centers in 13 markets and a combined development pipeline of €12.3 billion. Unibail also holds convention center and office properties.

Kai Klose, a real estate equity analyst at Hamburg, Germany-based private bank Berenburg, described the deal as positive for Unibail, highlighting the quality of Westfield's portfolio and the potential to enhance revenue growth by bringing new tenants into the combined portfolio. "With this move, not only is Unibail entering the U.K. (7% of the combined portfolio) and U.S. (22%), but it is also making its most significant expansion by far, after selectively buying shopping centers and/or companies in Poland and Germany in previous years," he said in a research note.

The takeover was similarly welcomed by Zeinab Zahnoun, real estate analyst at Paris-based independent equity research firm Alphavalue, who also commended Unibail's push into the U.K. and the U.S. through "highly attractive assets" and noted that the deal complemented the company's strategy of selling off smaller assets and investing the proceeds to develop larger assets.

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Zahnoun added that the deal could be a watershed for global retail real estate. "After the Hammerson Plc-Intu Properties Plc merger, this acquisition suggests that online retail pressure can only be checked by reinventing shopping malls into concepts closer to a leisure center. The sector may be bound for a degree of reckoning on that front," she said in an emailed comment.

The increasing polarization of the retail real estate market between prime retail destinations and secondary assets meant the deal was the right move at the right time, according to Neil Green, real estate research analyst at JP Morgan Cazenove. "At first glance, we think the creation of a global leader in prime retail property is a good thing (provided the economics of the deal make sense)," he said in a research note. "If retail is increasingly about differentiation and creating unique experiences, owning the world’s highest-quality portfolio offers several advantages."

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Other analysts noted the deal's potential impact on the market for prime U.S. retail property, or A-malls. Since Unibail's offer for Westfield values the company at $7.55 per share, this translates to a significantly lower capitalization rate for Westfield's U.S. assets compared to those of its American competitors, according to Omotayo Okusanya, a NewYork-based real estate equity analyst at Jefferies.

"We note that Westfield's last reported cap rate was 4.6% as at June 30, 2017, and this transaction was done at a premium to [net asset value]. This is meaningfully lower than our implied cap rates on Macerich Co. (5.3%), Simon Property Group Inc. (5.7%) and Taubman Centers Inc. (5.5%)," said Okusanya. "We believe the valuation has positive implications for A-mall players in the U.S. and possibly puts more pressure on them to consider strategic alternatives to close the gap between their current valuation and NAV."

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Samir Khanal, a New-York based equity analyst at Evercore ISI, said the deal "makes sense" for Unibail and gave a take similar to Okusanya on how it might affect U.S. A-malls.

"This deal certainly has positive implications for asset values for the other U.S. listed mall companies as Westfield’s overall mall portfolio produced sales of $721 per square foot, with the flagship assets producing sales of just under $900 per square foot and the regional centers doing $453 per square foot," he said in a note. "The most direct comparison to the U.S. market is Taubman, whose 24 assets produce sales in the $800 per square foot range, while Macerich's sales are $659 per square foot followed by Simon Property Group's sales at $622 per square foot and finally GGP Inc. at $590 per square foot."

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Among the few concerns raised by analysts amid the generally positive reception to the deal were issues around the structure of the new company and the logistics of managing the global portfolio. "The group's complexity will increase with the setup of a Newco real estate investment trust and the creation of stapled securities," said Klose.

During a presentation of the deal Dec. 12, Unibail's CFO Jaap Tonckens said Franco-Dutch Unibail would create a Dutch Newco REIT to hold Westfield's U.S. assets. "Also, the company will need to demonstrate how it will efficiently manage with four headquarters in Paris, Schiphol, Los Angeles and London."

"It's different managing a European portfolio or U.S. portfolio compared to a global portfolio," an equity analyst at a French investment banking firm, who asked not to be identified as he wasn't permitted to speak to the media, told S&P Global Market Intelligence. "You need to address specific issues regarding the organization of the teams and also, we are talking about real estate, so the location of the teams and the proximity of the assets is also something that will have to be solved properly."

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