At a time of ever-growing Internet sales, the UK’s biggest publicly traded mall owners are combining forces.
Hammerson Plc has agreed to buy its smaller competitor, Intu Properties Plc, in a deal that values the latter at about £3.4bn ($4.6bn). Hammerson is seeking to increase its scale to combat the threat of online stores and sluggish consumer spending.
The proposed all-share deal would create a real estate investment trust with £21bn of assets, the companies said in a statement yesterday. Including assumed debt, the transaction values Intu at about $10.9bn, making it the biggest-ever acquisition of a UK real estate company, according to data compiled by Bloomberg.
“While the merger makes strategic sense, it does not lessen the well-flagged structural headwinds facing the UK’s retail sector, and in particular the uber-mall segment,” Numis Securities Ltd analysts including Robert Duncan wrote in a note to clients.
Retail-property landlords have been shunned by investors, fearing the threat of online retail and the prospects for UK consumer spending in light of the Brexit vote. As a result, both Intu and Hammerson shares trade at wide discounts to the value of their assets. The two REITs expect to sell about £2bn of real estate if the deal goes ahead.
Intu climbed as much as 22% to 242 pence in London trading yesterday, its biggest ever gain. The shares were up about 20% at 12:02pm, reducing the decline this year to 15%. Hammerson dropped as much as 5.1%, the largest drop since June 27, 2016 — shortly after Britain voted to leave the European Union.
Billionaire John Whittaker, Intu’s largest shareholder, bought a stake of almost 4.6% in Hammerson earlier this year, fuelling speculation that the companies might merge. Intu’s cash flow is an ongoing challenge, given high debt costs and exceptional yet recurring swap costs, Bloomberg Intelligence analyst Susan Munden wrote in a note last month.
“We recognise the challenges in the consumer retail environment and what this transaction does is give a superior and larger operating platform,” Hammerson chief executive officer David Atkins said in an interview. “It enables us to drive costs down, particularly in terms of service charges for retailers.”
Under the terms of the transaction, Intu shareholders will receive 0.475 of a new Hammerson share for each Intu one they own. That values Intu at 253.9 pence a share, which is about 28% more than the December 5 closing price and 9% higher than the six months average.
The offer price reflects a 37% discount to Intu’s last reported adjusted net asset value at the end of June. Given that Hammerson also trades at a discount to NAV and the fact that it’s an all-share offer, the underlying discount to asset value is about 5%, Atkins said.
Intu owns 17 shopping malls in the UK, including Lakeside in Essex and the Trafford Centre in Manchester, and three in Spain. The properties have a total value of about £10bn.
The combined group will be led by Atkins and Hammerson chief financial officer Timon Drakesmith. David Tyler will be chairman and Intu deputy chairman Whittaker will fulfil the same role at the enlarged company.
Intu shareholders owning about 50.6% of the stock have agreed to the deal, according to the statement. If the transaction proceeds, Hammerson shareholders would own about 55% of the combined company. Whittaker’s Peel Group has agreed not to sell shares in the combined company for three years, as well as some restrictions on share purchases for two years.
Formal negotiations between the companies began this autumn, Atkins said. The catalyst was the appointment of Intu chairman John Strachan, who first joined the company as a non-executive director in 2015 before assuming his current role in May of this year.
“John and I go back many years and that really sparked some conversations which led to the discussion we have today,” Atkins said.
David Fischel, Intu’s CEO since 2001, will continue in the role until the deal closes, a spokesman said. Both companies declined to comment on his future at the company beyond that date.