M&A Spotlight Falls On Intu And Hammerson

Why are people talking about mergers or takeovers of Intu and Hammerson?

In a note in the last week of August, Morgan Stanley analyst Bart Gysens noted investors were likely pricing M&A activity into the two companies’ shares. The companies are the perennial subject of M&A speculation in the U.K., and shares in Hammerson rose 1.5%, with Intu rising 1.7% on the day.

So what did Gysens say?

On Hammerson: “The group’s standalone potential, its size, the lack of a dominant shareholder and the presence of several large global mall companies suggest that investors are unlikely to ignore strategic value in any M&A consolidation wave.”

On Intu: “We do think that M&A activity in the space would be a key upward risk to our Intu valuation, and therefore our Intu price target. Westfield's statement from 23 February 2017 that it has taken a small stake in Intu is drawing increasing attention to this debate.”

What is this about Westfield?

Aussie shopping centre giant Westfield said in February it had bought a small stake, less than 3%, in both Intu and Hammerson.

“We think there was an overreaction of the markets to the Brexit vote,” Westfield co-Chief Executive Peter Lowy said at the time. “We believe there are good long-term investments and would like to keep a finger in the market.”

But investors did not ignore the potential for it to make a strategic move, and shares in the two companies jumped, Intu by around 7% on the day. Westfield previously has upped its stake in companies ahead of potential merger action.

Why might the two companies be takeover targets?

Both companies are trading at a discount to where Morgan Stanley thinks the companies' assets will be valued at the end of 2018 — 20% in Hammerson’s case, 30% in the case of Intu. Taking the company private is a way of buying assets at a discount when values across the world are at record levels.

But that thesis only holds true if you believe the value of the assets will not decline. Hammerson and Intu own some of the best malls in the U.K. and Europe — but retail is a challenging sector at the moment, and the example from the U.S. is that even good-quality malls can be hit by declining rents and values.

Is anyone other than Westfield in the mix?

Unibail Rodamco and Klepierre are two huge Continental European shopping centre giants and Unibail in particular has looked at entering the U.K. in the past. But Gysens said if it had to issue shares to make a big acquisition, that would be bad for its share price in the short term.

Who are the key players in this?

The most intriguing figure is reclusive U.K. billionaire John Whittaker. He is deputy chairman of Intu and owns a 27% stake in the company after swapping the Trafford Centre in Manchester for shares in a £1.6B deal in 2011. In June it emerged he had taken a 4.6% stake in Hammerson, raising the prospect of him acting as a “marriage broker” for the two companies, according to Jeffries analyst Mike Prew.

Would the companies be better off together?

As Gysen’s point about Hammerson’s size indicates, neither company is seen as having sufficient scale to compete with Unibail or Klepierre as pan-European shopping centre owners, and being truly pan-European is seen as an advantage in the retail sector. Hammerson management is better regarded than that of Intu and it is seen as a better centre manager — part of the reason Whittaker joined Intu’s board was to improve its asset management capabilities.

Will a merger or takeover actually happen?

When ranking its top prospects for European real estate M&A earlier this year, investment bank Green Street gave both Hammerson and Intu about a 10% chance of being taken over.

We know that Intu’s board does not fancy the prospect of being taken over — it did the deal with Whittaker in 2011 in part to fend off a takeover offer from Simon Property Group. Simon offered 425p a share. Intu said its shares were worth 600p and rejected the offer. Current price — 245p.

It is unlikely Hammerson would welcome a merger or takeover approach from a rival either — whenever Chief Executive David Atkins has it put to him on panels or in interviews that his company is too small, he visibly bristles.

But in this cycle as opposed to the last boom running up to 2007, the U.K.’s biggest REITs are proving increasingly willing to sell assets at peak prices and return capital to shareholders. If an offer came in at net asset value for either company, could they in good conscience turn it down?