What Will Happen In Retail’s Messy Love Triangle?

It’s an awkward situation. Hammerson wants to get with Intu. Intu wants to get with Hammerson. But Klépierre wants to get with Hammerson. And it does not want to get with Intu. Hammerson has said it does not want to get with Klépierre. But secretly it might hold a torch for its gallic suitor.

By this time next week we will have a much clearer idea about which of the U.K. and European mega-mergers that have been proposed will actually happen. Here are the key questions answered.

Who is trying to buy whom and for how much?

In December shopping centre REIT Hammerson announced it was buying rival Intu for £3.4B, or 254p a share. But in mid-March it emerged that French shopping centre giant Klépierre had spoken to Hammerson about a £5B, 615p-a-share bid. It said that if it did make a bid, it definitely did not want to buy Intu as well. Harsh.

Hammerson has a portfolio valued at £10.6B across the U.K., France and Ireland, while Klépierre’s is valued at €24B (£21B) across most of Continental Europe but not the U.K.

How did that bid go down?

Hammerson said it had rejected Klépierre’s initial overture in less than a day, and has gone into full-on defence mode. Klépierre’s initial price was a 40% premium to Hammerson’s share price before the talks were revealed. Hammerson said it was an insult, much lower than its net asset value. Last week it put out an updated valuation. Despite the fact that the first quarter has been the worst in terms of retail sales and administrations in almost five years, it said its net asset value had gone up, to 790p a share.

So which is the right value, the share price or the asset value?

Analysts have been pretty sceptical about the value Hammerson has put on itself.

“There have been very few valuations in the shopping centre market and the ones I’ve seen point to downward pressure on pricing,” Green Street Managing Director Hemant Kotak said. “What is the right reference point — is it what a few valuers deem Hammerson’s property to be worth, or is it what a willing buyer and seller will transact at?”

“The public market is run by a larger amount of capital and greater intellectual capital. Public markets will get this right,” Jefferies analyst Mike Prew said.

So what happens next?

Klépierre has until 16 April to “put up or shut up”, i.e. make a firm bid or back off.

The company has been quiet ever since its initial approach was announced. But reports have indicated the company has been courting Hammerson shareholders, trying to persuade them to support a bid and pressure the company to consider any approach it does make, and shareholders are encouraging it to at least engage with Klépierre.

If it does bid, analysts have indicated that if it lodges a firm bid at 615p, it is likely to be rejected out of hand once again. Green Street said in a note that Hammerson’s board should consider any offer above 615p, and that it should support any offer of 700p or above.

“The alternative is an unfavourable tumble back below the 500p mark, with further downside risk,” it said.

What do the share prices tell us about whether there will be another bid?

Hammerson’s share price implies that the stock market is pretty sceptical about the prospect of another bid. Its shares are at 545p, 10% below Klépierre’s initial price.

Should Hammerson be accepting a bid?

In Green Street’s words: “Hammerson’s Board has been bold; are its actions in investors’ best interests?” It argues that it will be really hard for Hammerson to give shareholders a return that would surpass what they would get if they accepted an offer from Klépierre. It estimated that Klépierre will make an average annual return of 8% for the next five years, and that Hammerson would need to make a 15% annual return to justify not selling itself. Green Street analysts doubt this will happen. A lot will also depend on whether Klépierre is willing to pay in cash or in shares.

Would buying Hammerson be a good deal for Klépierre?

Not all analysts and shareholders think so — its share price has dropped since its approach was announced.

“Most of the investors we have spoken to were surprised by Klépierre's approach for Hammerson,” analysts at Barclays said in a note. “Most of the investors we have spoken to would rather see Klépierre on a standalone basis, and they do not see a clear rationale for a combination with Hammerson.”

The counterargument is that this is a once-in-a-lifetime opportunity to buy Hammerson. Supporting the deal are the current disruption in the retail environment and the lukewarm reception Hammerson shareholders have given the Intu deal, showing they would welcome an alternative proposal.

Ah yes, Intu, where does this leave it?

Well, when Hammerson published its updated valuation it said it was deliberately not publishing the documentation on its proposed takeover of Intu until it knows what Klépierre is doing regarding a bid. Could this be because it will try and wriggle out of the proposal it has made? It is not clear whether it could back out now under the rules of the Takeover Panel.

Why would Klépierre not want to buy Intu as well?

Pretty much everyone apart from Hammerson has been down on its takeover of Intu. The deal would raise Hammerson’s U.K. exposure — the worst performing part of its portfolio — from 57% to 75%, and also dilute the impact of its strongly performing outlet village business.

“This is not a cash bid for a high-quality U.K. REIT by an overseas buyer, which would trigger a re-rating of the sector, but a coalition of weak business models,” Prew said.

There seems to be a certain amount of historical irony about all this.

There certainly is. Hammerson is adopting exactly the same strategy Intu did in 2010 when Simon Property launched a hostile takeover for the company: putting a high valuation on itself in order to put off a potential suitor. And who owns 20% of Klépierre? Why David Simon of course. It remains to be seen whether his past experience colours the way Klépierre goes about the next stage of the bid — as Prew said, the boards of property companies often show remarkable self-interest when it comes to takeover offers.

“There's a great deal of inconsistency in how boards think about bids, and whether an approach is solicited or unsolicited matters a lot,” Green Street said.

If it does reject Klépierre’s bid, Hammerson will hope it does not suffer the same fate as the company it is now buying. With its shares at 375p, Intu rejected a bid of 425p a share, saying it was worth at least 625p. Its shares never got above 400p, until it eventually capitulated and accepted Hammerson’s offer of 254p, essentially destroying £5B of value for shareholders.