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What’s the logic behind Westfield’s split?

Although there is certainly logic behind Frank Lowy’s proposal to split Westfield’s (ASX: WDC) global assets in two, there have been suggestions that the shopping centre giant’s chairman may have pushed the boundaries a little too far this time.

The company last week announced its intentions to split its domestic and international assets, whereby its Australian and New Zealand assets would be combined with those of Westfield Retail Trust (ASX: WRT) to form a new company, to be known as Scentre Group. Similarly, its international assets would also form a new company to be known as Westfield Corporation.

Shareholders embraced the decision early, sending shares soaring over 6% in early trade on Wednesday. However, shares in both Westfield Group and Westfield Retail Trust actually ended the week lower than they were prior to the announcement, reversing any gains that had been realised.

Whilst it is anticipated that the Lowys will likely have a “plan B, C and D”, one leading global fund manager believes that there is a “very real risk” that the proposal may not go through.

US analysts Green Street Advisors has stated that the deal made “ample strategic sense” as Westfield Corporation (made up of the international centres) would boast a “strong near-term growth profile”, however, they also believe that debt allocation and the location of its global listing and headquarters could be problematic. After all, how functional would it be to be based half a world away from each of your assets?

A problem also exists in Australia. Whilst the earnings of both Westfield Group and Westfield Retail Trust would be higher from the deal, it seems that for investors in WRT that will be achieved through higher gearing. As reported by The Australian Financial Review, the management cost could be around $1.8 billion.

Foolish takeaway

Management of Westfield believes that splitting the global assets between two new companies will enable both to focus on growth and funding to deliver greater shareholder value for all. If you’re not so confident that that will be the case however, there are plenty of alternatives.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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