Real Estate

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

The smart money in British retail property can see just how tough things are. 

One of the U.K.'s biggest shopping-mall owners, Intu Properties Plc, has agreed to be bought for 3.4 billion pounds ($4.6 billion) by rival Hammerson Plc when its shares are close to rock bottom. Lead shareholder and property tycoon John Whittaker is even backing the sale.

Bigger is Better
Hammerson and Intu would jump from fourth and fifth to second place after their tie-up
Source: Hammerson presentation
Publicly traded European REITs by retail gross asset value

Hammerson shareholders may still balk. The company -- which owns stakes in the Bicester Village and Birmingham's Bull Ring shopping centers -- has been buying properties overseas that promise more growth, cutting the proportion of its assets in the U.K. to about 60 percent. Snaring Intu would take that back to 75 percent just as Brexit triggers extreme uncertainty for the economy.

The Good, the Bad, the Ugly
Hammerson is swooping on rival Intu after both stocks suffered following the Brexit vote
Source: Bloomberg

There aren't huge synergies in combining commercial property companies -- the audited financial benefits are just 25 million pounds a year, worth perhaps 200 million pounds in today's money. That doesn’t pay for the 740 million-pound premium Hammerson is paying over Intu's market capitalization on Tuesday, the day before the transaction became public.

Hammerson plans disposals, largely of British properties, to bring its exposure back to where it is now. These may be hard to achieve at a decent price.

Despite these drawbacks, the deal still makes sense. The shift to online shopping has left the U.K. with too much floor space. Retailers are cutting store numbers. They want the best sites in attractive malls that can pull in the punters. Operators have to provide some extra razzmatazz to the experience, with special events, ice-rinks, pop-up stalls and so on. Scale and expertise help here.

Being bigger will also give Hammerson more leverage over tenants. Expect trustbusters to take a keen interest.

The financial terms look more reasonable to Hammerson shareholders considering Intu stock had been trading at a near 50 percent discount to its net asset value, compared with roughly 30 percent at their own company. Even if the purchaser's shares traded at net asset value, its offer would still be worth less than Intu's net assets under the terms of the deal.

Moreover, the financial benefits are likely to be more than the companies' conservative forecasts today. Plus the buyer might be able to refinance Intu's debt: the target is paying about 3 percent to 3.5 percent on borrowings that will mature in the next five years, compared with Hammerson's own rate of about 2.6 percent. Altogether, the synergies could be twice what's stated.

This isn't the deal of the decade. It would be wrong to think that Hammerson is calling the bottom of the market, just because it's willing to do a big acquisition. The transaction was clearly born out grim necessity, but still looks better than the standalone case for either company. 

Whittaker likes Hammerson stock, having bought 5 percent of the company back earlier this year. But he's swapping Intu shares at a level seen as recently as August. That is hardly a sign of confidence in the outlook for U.K. retail commercial property.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net