There will be no one happier with the near-unanimous approval of the merger of Novion and Federation Centres than reclusive billionaire John Gandel.
It was Gandel’s reservations and frustrations with the way Novion -- his co-owner of the giant Chadstone shopping centre on which his fortune was built -- was managed that led to the proposal to merge the much smaller Federation Centres with the former Commonwealth Bank-managed CFS Retail.
Gandel had a 21.6 per cent direct interest in Novion, with about $1.6 billion, as well as pre-emptive rights over CBA’s 4.6 per cent, as stake -- along with the $1.8bn or so value of his own 50 per cent interest in Chadstone.
While the merger that was approved today, effected via what is essentially a reverse takeover by Federation Centres of the larger Novion, has a strategic and financial rationale of its own, it was Gandel’s desire to put his preferred management in place that ultimately led to and drove the deal. Federation’s Steven Sewell was well known to Gandel from his time running Charter Hall.
The merger represents a major change in the structure of the retail property market, with the new Federation controlling $22bn of centres across the spectrum of retail properties, from regional and sub-regional, to direct factory outlet centres through to the blue-chip centres within the Novion portfolio, of which Chadstone is the flagship.
The merged group will be second only to Scentre Group as an owner and manager of retail properties in this market and will have a very big initial pipeline -- about $2.5bn -- of development options. It will be a retail property owner of global significance.
Underlying the strategic logic of the combination -- the two portfolios are complementary and produce real diversification -- is the financial logic provided by a world where debt, for prime borrowers, is historically ultra-cheap.
While the transaction costs were steep -- about $470 million -- and the cost of paying out the entities’ existing borrowings represented the larger part of those costs, the ability to save $35m a year or so in interest costs and significantly extend the maturity profile of the debt represented a unique opportunity.
There are conventional synergies, more than $40m a year of them, but they wouldn’t have been compelling by themselves in a merger that will create a property trust with a market capitalisation of about $12bn, particularly as Federation itself was regarded as having a lot of value-creating opportunities.
The re-financing opportunity provided the bulk of the financial argument for the displacement of Novion’s management with Federation’s Sewell and his chief financial officer Tom Honan but it will now be up to the combined management (in numerical terms each business contributed half the executive committee that reports to Sewell) to make the merger work at an operational level.
Sewell, whose record at Federation was impressive, will be conscious that he will now need to justify the faith that Gandel -- who will be the biggest security holder in the enlarged entity as well as co-owner of its best asset -- had in him and his team. He will need to deliver on the growth potential within the enlarged portfolio to keep onside a billionaire who has most of his net worth now directly or indirectly exposed to Sewell’s stewardship.