In the end, common sense and the will of the majority, with the help of some intense lobbying from the Westfield camp, has prevailed and the clean separation of the group’s international and Australasian businesses will proceed.
The narrowness of the margin, a fraction over one percentage point above the 75 per cent majority of securities voted, underscores how significant Dick Warburton’s decision to adjourn the earlier meeting of Westfield Retail Trust securityholders and the breathing space that gave Westfield to make stronger arguments for the proposal was.
At that earlier meeting, with the proxies in favour, at 74.1 per cent, falling short of the approval threshold, the proposal was lost. Today about 100 million more securities were voted by about 12,000 more security holders and the proposal scraped over the line with 76.09 per cent support.
Apart from the intense effort to drum up more support, and clearer arguments in favour of the separation, Frank Lowy’s declaration that Westfield would spin off a competing entity to WRT if the proposal to merge WRT’s operations with the Australasian operations of Westfield Group failed would presumably have had some influence over the outcome.
Two vehicles, each owning a share of the underlying assets – the Westfield shopping centres – but one managing the other, collecting management fees, having a development dimension and competing for capital with WRT would have been a messy outcome and potentially a damaging one for WRT security holders. It wouldn’t have been a disaster but it is arguable that it would have negatively affected WRT’s value and prospects.
After today’s vote, the new Scentre Group won’t be competing with WRT but contain it, along with an internalised management and a development tinge. While the merged group will have higher gearing than WRT the merger ought to create more upside and value for WRT security holders than they have today.
Even at the initial, adjourned meeting, the overwhelming majority of securityholders wanted the merger to go ahead and Scentre Group to be formed.
There is compelling strategic logic to the separation of the Australasian businesses, which generates relatively low-risk rental income from a mature portfolio of high-quality centres from the more development-oriented international operations.
The opposition to the proposal was centred on a relatively small group of institutions, led by UniSuper, concerned about the value attributed to Westfield’s operating platform and by any exposure to development activities.
For some institutions, particularly those with defined benefit schemes to fund, passive inflation-protected long term income streams are very attractive but scarce. WRT in its current structure offered those income streams and, because it has (unlike most of its peers) traded at a discount to asset backing, an attractive way of getting a low-risk and higher-yielding exposure to them.
The arguments put forward by critics of the Scentre proposal were legitimate but came from a different perspective to the majority of WRT securityholders. They shared the same interest in income but would also want the prospect of growth and capital gains, and obviously saw the internalisation of management and the big fees associated with the current external management as a positive. WRT is one of the few remaining listed property trusts with an external manager.
The Lowy family will have a modest exposure to the new Scentre group once the separation occurs, but their much larger exposure and their core interest will lie in the international business, with its assets and operations focused mainly on the US and UK.
It is almost inevitable that at some point in future, the headquarters of that international business will shift to the northern hemisphere to reflect the geography of its asset base and the likely improved appeal of the new Westfield Group to northern hemisphere investors.