Westfield jumps 6% as domestic and international business are split

Westfield Group (ASX: WDC) jumped 6% in early trade on Wednesday after the company announced the split of its domestic and international assets. Westfield Group’s Australian and New Zealand assets will be combined with the assets of previously the de-merged Westfield Retail Trust (ASX: WRT) to create Scentre Group. Scentre Group will have total assets of US$28.5 billion in 47 centres throughout Australia and New Zealand.

The international assets held by Westfield Group will be spun off into a new company called Westfield Corporation. Westfield Corporation will have total assets of US$17.6 billion in 44 centres but has a higher proportion of centres under development, meaning that investors should expect higher returns and potentially smaller dividends in the short term. Both companies will be listed on the Australian stock exchange.

The split draws some parallels to other splits or ‘demergers’ announced recently. Amcor (ASX: AMC) announced a demerger of its lower and higher growth business components in order to allow investors to choose between the growth or income side of the business. The Westfield split will group the solid, dependable, lower growth Australian and New Zealand assets into an income focussed company, while the higher growth international operations will be grouped separately.

The move addresses the poor share price performance of Westfield Retail Trust since it was split from the larger group in late 2010. The trust has returned just 12% in share price growth over three years and just 4% this year compared with a 13% gain in the ASX 200 (ASX: XJO).

The proposal is slightly complex for existing shareholders. Existing Westfield Retail Trust shareholders will receive $285 and 918 shares in the new Scentre Group for every 1000 shares currently held in the trust. The cash component is the equivalent of an $850 million share buyback at a 14% premium to Tuesday’s closing price. Meanwhile, Westfield Group shareholders will get 1000 securities in the new Westfield Corporation and 1246 securities in Scentre Group for every 1000 Group shares held.

Foolish takeaway

History shows that companies that demerge radically different parts of a business outperform over the short and medium term following the demerger. Westfield Group’s two business components — the domestic and international businesses — have very different growth profiles and thus capital expenditure and management requirements.

Investors will now have the opportunity to invest in either the growth-orientated international business or the income-focussed Australian business. This will be a benefit to investors going forward in terms of investment options and share price performance.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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