While the management team behind global property giant Westfield (ASX: WDC) are confident they will be able to convince investors of the merits of the proposal to split its domestic and international businesses, a number of key institutional investors could get in the way of the deal.
Early in December, Westfield announced its intentions to merge its Australian and New Zealand assets with those of Westfield Retail Trust (ASX: WRT) to form a new company called Scentre Group. Meanwhile, its international assets – which many have pegged as having better long-term growth prospects – would also form a new group to be named Westfield Corporation.
Under the breakup, Scentre Group would take control of $28.5 billion worth of shopping malls while Westfield Corporation would control a US$17.6 billion ($19.7 billion) portfolio with centres in the UK and the US, with potential to expand into Italy, Belgium and Brazil. There is logic behind the deal, with the company arguing that both corporations would be better positioned to focus on their own growth and funding.
However, they could face significant investor backlash with a very real possibility of the deal falling through given that 75% of security holders are required to vote in favour of the proposal. At least two institutional investors in Westfield Retail Trust have already stated they will oppose the move, as reported by The Australian Financial Review.
After all, most investors are still trying to understand the long-term implications of the split as well as the details on valuation and transparency of the deal. For instance, among other concerns, there is confusion regarding the total costs that will be assumed by Westfield Retail Trust as well as whether the new group's S&P A+ credit rating could be downgraded as a result of the deal.
Foolish takeaway
In order for the deal to be passed, the Lowy family will need to explain the implications and benefits in greater detail and may also need to sweeten the proposal by altering the merger ratios to convince investors.
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