Why have Westfield Retail Trust shares outperformed Westfield Group?

With the proposal heavily weighted towards the Group, one would have expected the share performance to be the opposite.

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Shareholders of shopping mall giant Westfield Group (ASX: WDC) and Westfield Retail Trust (ASX: WRT) have remained in the dark regarding the proposal to split the businesses ever since it was announced in December last year. While investors will be hoping that greater light will be shed on the plan over the coming weeks, it is interesting to note the performance of the companies’ shares since the announcement was made.

Under the proposal, the Group’s Australian and New Zealand assets would be merged with those of the Trust, forming the new Scentre Group. In the meantime, the group’s UK and US holdings would be spun off into a new company to be known as Westfield Corporation, which the Lowy family would follow. It is a very complicated arrangement that has baffled investors and analysts alike – even explanations from Peter Allen, the group’s CFO, have failed to persuade the market.

While there is certainly logic behind the proposal, shareholders in the Trust have argued that the costs they will be responsible for are far too expensive whereby WRT would have to pay roughly $1.8 billion for the management and development rights. Indeed, the deal may be heavily weighted in the Group’s favour based on the current terms. As such, one would have expected the Group’s shares to have been the better performers while the Trust’s should have lagged the market.

Instead, Westfield Group shares have climbed just 1% since the deal was announced despite a very positive reaction from shareholders early on. Meanwhile, although WRT shareholders initially sold down the shares, they have climbed steadily to return 4.7% since the proposal.

Foolish takeaway

Investors must remember that a 75% approval rate is required in order to have the proposal accepted. Based on the current terms, a number of institutional investors have stated that they will vote against the deal, signalling that it might not even happen.

Alternatively, shareholders are anticipating that the Lowy family will sweeten the deal in order to see it approved. This would likely involve either decreasing the costs being recognised by WRT or increasing the cash payment for investors higher than the current $285. Under the current proposal, shareholders of the Trust will receive 918 securities in the Scentre Group as well as a payment of $285 for every 1000 WRT shares held.

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

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