Since Westfield Group (ASX: WDC) announced its proposal to split its domestic and international businesses in December last year, there has been much speculation regarding the terms and fairness of the deal for Westfield Retail Trust (ASX: WRT) shareholders.
Under the proposal, both parties' Australian and New Zealand assets would be merged to create a new group to be known as Scentre Group, while its international stores would be spun off into a new company to be known as Westfield Corporation.
While there is logic behind the deal, in that both entities would be able to focus on their own redevelopments and fund their own growth, many WRT investors have indicated that they will vote against the proposal. They argue that they are paying too much (roughly $1.7 billion to $1.8 billion) for the management rights and other intangibles including development rights.
Given that 75% of voters must approve the proposal for it to go ahead, it appears likely that the group will sweeten the deal to make it more appealing for WRT investors. Andrew Smith, fund manager for property investors Freehold Investment Management, believes that this will involve changing the multiples of the Scentre merger ratio which would reduce the price of management rights.
According to The Australian Financial Review, one investment bank has suggested adjusting the merger ratio from '48.6%:51.4%' (meaning that Westfield Retail would own 51.4% of Scentre Group) to '46.9%:53.1%', which could reduce the management rights and other intangibles costs by around $600 million. This would certainly make the proposal more appealing for investors.
Another way the deal could be sweetened is by increasing the cash payment given to investors. Under the current proposal, shareholders of the Trust will receive 918 securities in the new Scentre group as well as a payment of $285 for every 1000 WRT shares held.
Foolish takeaway
At their current prices, Westfield Group and Westfield Retail Trust are both trading at reasonable prices. Westfield Group is trading just above $10 a share and offers a 5% dividend yield while the Retail Trust is currently priced at $3.02 per share.
