Blackstone Said to Acquire Centro's U.S. Shopping Centers for $9.4 Billion

Blackstone Group LP, the world’s largest private-equity firm, agreed to buy Centro Properties Group’s U.S. shopping centers for $9.4 billion, two people familiar with the matter said.

The purchase of 588 malls, at the price they were valued at as of Dec. 31, may allow Centro’s Australian operations to continue as an independent company, said one of the people, who declined to be identified before an official statement. The deal may be announced as early as today, the person said.

Blackstone’s biggest deal since 2007 signals the firm is betting on a recovery in U.S. commercial property after the subprime crisis that derailed Melbourne-based Centro’s U.S. acquisition spree as debt costs soared. Defaults on U.S. commercial real estate mortgages held by U.S. banks fell in the fourth quarter from the previous three months, the first decline in almost five years, according to New York-based real estate research firm Real Capital Analytics Inc.

“We’re cautiously optimistic about U.S. retail sales, so this is probably a good bet on the part of Blackstone,” said Michael Wood, who helps oversee $5.1 billion at Quadrant Real Estate Advisors in Sydney. “If the price Centro is getting is close to net tangible assets, that’s a good sign.”

Miche Paterson, a spokeswoman for Centro at communications firm Kreab Gavin Anderson, didn’t respond to a voicemail message. Peter Rose, a Blackstone spokesman in New York, didn’t respond to an e-mail seeking comment outside business hours.

The Wall Street Journal reported the sale earlier today.

U.S. Malls

The purchase would be Blackstone’s biggest since the acquisition of Hilton Worldwide Inc., completed in October 2007, according to data compiled by Bloomberg.

In the U.S., Centro and the funds it manages own 556 community and neighborhood shopping centers, seven malls and lifestyle centers, 11 “miscellaneous” properties and nine land parcels, according to company statements. It also owns five redevelopment properties. The shopping centers and redevelopment sites were 88 percent leased as of Dec. 31, according to the company.

Centro’s U.S. shopping malls are located in 39 of the 50 states.

U.S. commercial property values are back to where they were five years ago and are up more than 30 percent from their 2009 low, according to an index by Green Street Advisors, a U.S. real estate research company.

The default rate on loans for office buildings, malls and other commercial properties in the U.S. dropped to 4.28 percent of loan balances in the three months to Dec. 31 from 4.36 percent in the previous quarter, according to Real Capital in a Feb. 24 statement.

Scrapping Sale

Centro, which manages A$16.5 billion ($17 billion) of shopping malls in Australia, New Zealand and the U.S., put its assets up for sale two years ago. The company had A$16 billion of debt across all its businesses as of Dec. 31, with A$3.1 billion of loans due by the end of this year.

Centro’s shares have fallen 6.3 percent this year and closed at 15 Australian cents on Feb. 25 before they were halted from trading.

The company has negative net equity of A$1.6 billion.

Centro is considering scrapping the planned sale of its Australian assets and using the proceeds from the U.S. deal to reduce debt, one of the people said.

While the sale of its Australian assets “isn’t off the table,” Centro is weighing such a move against other options, Chief Executive Officer Robert Tsenin said when the company announced earnings on Feb. 24.

Return to Profit

Centro first announced a restructure in 2009 after its U.S. buying spree backfired as the world’s largest economy contracted and debt costs soared. Since then, property and financial markets have improved, and a recapitalization, rather than the sale of all its assets, looks more likely, Tsenin said last week.

The S&P/ASX 200 Index has climbed 54 percent since its trough in March 2009 during the global financial crisis.

The hedge funds that bought most of the company’s debt from its original lenders are willing to engage in recapitalization efforts, including taking equity positions and injecting new capital, according to Tsenin.

Centro returned to profit, posting net income of A$553.4 million in the fiscal first half, as the value of its properties rose and the Australian dollar strengthened. Centro Retail Trust, its listed property unit, reported a A$292 million profit for the period.

“This is a step in the right direction,” said Winston Sammut, managing director of Maxim Asset Management. “They were in a position where they had to sell, so to get book value is a bit of a positive. But this is only one step in the process.”

Backfiring Strategy

Former Chief Executive Officer Andrew Scott borrowed to accumulate malls, which he spun off into 34 syndicates, three wholesale funds, two unlisted funds of funds and one listed property fund, and managing them for fees.

The strategy, aimed at raising management income and accelerating profit growth, backfired when the global financial crisis hit, causing property values to plummet and borrowing costs to soar, leaving Centro unable to refinance its ballooning debt. Attempts since then to raise enough capital to repay the debt have been largely unsuccessful, and Glenn Rufrano, who took over from Scott in January 2008, stepped down two years later to be replaced by Tsenin.

Centro’s lenders, including BNP Paribas SA and National Australia Bank Ltd., which took stakes in Centro in December 2008 to cancel some debt and keep the company out of bankruptcy, recently sold their holdings at losses to hedge funds.

Cromwell Properties Group, which was examining Centro’s assets for a possible partnership in its syndicates unit, ended talks without an agreement on Feb. 15, saying Centro’s lenders hadn’t approved a deal.

A partnership between Morgan Stanley’s global real estate fund and Barry Sternlicht’s Starwood Capital Group LLC, and a group led by NRDC Equity Partners and AREA Property Partners were the other two final bidders, people familiar with the matter said on Feb. 25.

To contact the reporters on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net; Angus Whitley in Sydney at awhitley1@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net; Philip Lagerkranser at lagerkranser@bloomberg.net

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