Westfield’s capital raising
Recently, a lot of people have been asking my opinion about the Westfield’s demerger and the new Westfield Retail Trust offer. I will briefly explain the reasons behind Frank Lowy’s decision and what I think about this IPO.
The Westfield Group (WDC @ ASX), previously named by the conjunction of Westfield Holdings, Westfield Trust and Westfield America Trust, is now redistributing pro-rata units to a new entity, in order to list a new security exclusively focused in the Australian and New Zealand retail real estate market.
A portion of the Westfield Group stapled unit will now represent the new Westfield Retail Trust stapled unit. The group will distribute part of its operations and allocate some of the financial resources to the new retail trust. For every 4.23 units of the current WDC stapled units, the current shareholders will be entitled to one Retail Property Trust unit. Both structures will still be connected as a joint venture and the Westfield Group will be held as the responsible entity.
In this case particularly, I believe that the process of raising capital through the IPO is a great idea, considering a medium to long-term approach. The group, under the sharp eyes of the chairman Mr. Lowy, have shown an outstanding management performance and Westfield’s assets are very hefty.
I am not and never was a big fan of IPO’s (like Marcus Padley would say “If IPO’s were good they would not be offered to you”) and obviously the proposal delivers an over-optimistic expectation that the group will distribute capital to its members and will generate almost-instant capital growth. But this is not the mom-and-pop groceries store we are talking about. The brand is well-known and people buy it.
This will potentially create better value than its current structure and there is a necessity for this type of security. Also despite this, the potential of the retail real estate market in both Australia nad New Zealand is clearly in demand and have been solidly growing.
The offer will distribute $7.3 billion of capital to members through the creation of the Retail Trust. The PDS informs that the scope initially is to raise up to $2.0 billion out of the IPO and another $1.5 billion from the eligible Westfield securityholders. Also the Offer is underwritten for up to $1.75 billion.
Talking about the Westfield Group’s units, I’ve seen that quite a few stockbrokers have downgraded the stock to a HOLD recommendation and some warned a SELL.
I don’t see a reason for panic and if we are talking value investing, there is no reason to sell the security, unless you want to time the market. The risk indeed have increased as the Westfield Group’s asset allocation will be mostly exposed to the overseas markets (with 55 centres in America and 8 in the UK). However, due to its strategical location within these countries, Westfield’s structure in the US and UK is consistent and the business is well-positioned compared to the other retail giants.
The group is in a strong financial position and one of the largest listed real estate retails in the world. The levels of gearing are acceptable and the group’s EBITDA was always above the average. One thing Frank Lowy has shown is how to implement sustainable growth.
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