As investors continue to wait for further light to be shed on the controversial merger arrangement between Westfield Group (ASX: WDC) and Westfield Retail Trust (ASX: WRT), Bank of America Merrill Lynch (BoAML) has given its take on where the value lies for investors.
On December 4 last year, both entities announced the proposal to merge their Australian and New Zealand assets to form a new entity known as Scentre Group, while the Group’s international assets would be spun off to form Westfield Corporation. While the deal is widely thought to be heavily weighted in the Group’s favour, it has been anticipated that it would be sweetened for the Trust.
However, the investment bank revised its outlook for the Trust, downgrading the stock to “underperform” based on the limited upside potential of the shares even if the deal does receive approval. The bank has given the Trust a price target of $3.25 and while its shares are already trading at $3.06 (roughly 5.4% above their price when the proposal was announced), there is just a 6% upside for investors. BoAML said: “With limited upside, and risks to the downside if shareholders vote against the deal, we believe the valuation is no longer compelling.”
On the other hand, it recognises greater value in Westfield Group, upgrading the stock to a “buy” recommendation based on its strong international prospects. The shopping centre giant has been redeveloping its Westfield London and Croydon stores (located in South London) as well as its Ground Zero centre in New York, which all promise to be amongst the group’s strongest stores.
Westfield Group and Westfield Retail Trust have both underperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the last 12 months, falling 6.8% and 1.6% compared to the market’s 6.2% gain. While I believe the merger proposal will be sweetened in the Trust’s favour (which could push shares higher than BoAML’s price target), I am more bullish on the Group given its stronger international operations.
With shares currently trading more than 17% below their 52-week high, now would be an excellent time to stock up on the retail behemoth.