Crikey Clarifier: Lowy loses, so what now for Westfield?

Australia’s second-richest man Frank Lowy, worth almost $7 billion, suffered a huge setback yesterday when a key vote to restructure the global shopping centre empire he co-founded in 1960 was postponed in the face of a backlash from investors.

What’s he up to?

This is the third Westfield restructure in a decade, so it’s hard to keep track. In the old days, the parent business Westfield Holdings (in which the Lowys held a controlling stake and amassed their wealth) took all the development risk — building, leasing and managing the shopping centres — while ownership of the malls was transferred to the listed Westfield Trust (the Australasian malls) and later also the Westfield America Trust (the American malls). Under this structure, copied from property groups Lend Lease and GPT, the listed property trust paid Westfield a handsome management fee and enjoyed ever-increasing rent (paid out to unitholders as tax-effective distributions) and growth in valuations.

Then “stapling” came into vogue: property investors wanted to share in the development profit, and stop the fee drain, by “internalising” or combining the management business and the assets. So in 2004 the Lowys stapled together Westfield Holdings, Westfield Trust and Westfield America Trust to form a juggernaut that expanded into the United Kingdom. Then things turned sour. Multiplex’s debacle building London’s Wembley Stadium signalled the dangers of the new aggressive, highly geared vehicles — which took on development and currency risk — before the financial crisis wiped out a string of property plays like Centro, GPT and Mirvac. Investors hankered for the stable returns of good old-fashioned property trusts. So in 2010 Lowy — who came through the GFC in remarkably good shape — spun out the Westfield Retail Trust (WRT), meant to be a low-geared vehicle with passive stakes in the Australasian malls. Last year the Lowy family sold their entire stake in WRT for $665 million, retaining an 8% stake in Westfield Group.

Now the Lowys want to unstaple all the remaining Australasian property interests and the development and management business from Westfield Group and restaple them with WRT, to create an all-new listed vehicle, Scentre Group. A renamed Westfield Corporation, listed on the ASX for the time being, would own and manage malls in the US, UK and Europe, and licence the Westfield brand to Scentre for nothing. The Lowys would emerge with 8% of Westfield Corporation, 4% of Scentre, and patriarch Frank would be non-executive chair of both companies.

Why do that?

While Frank Lowy has deep roots here — he lives in Sydney (Point Piper), as do two of his three sons David (Vaucluse) and Steven (Watsons Bay), and is chairman of Football Federation Australia until the end of next year. But the restructure would shift the bulk of the family’s business interests overseas, to be invested in uber-prime assets like Westfields in London and LA, and target high-risk, glamorous markets like New York and Milan, which is getting the first Westfield on the continent. Management of the Australasian business will be left in the hands of long-time Lowy lieutenants like finance chief Peter Allen. Westfield dominates the shopping centre industry here, but the market is seen as mature, low growth and vulnerable to increasing online sales and the decline of department stores.

What went wrong?

A sizable chunk of WRT investors — including the biggest, Unisuper, holding 8% of the trust — hate the deal, which they see as advantageous to Westfeld Group, even after it was sweetened earlier this month. They don’t like the extra debt they’re saddled with, which will increase gearing from 22% to 37%, and reduce asset backing from $3.47 to $2.88 a share. They don’t like putting in 68% of the new Scentre’s assets, but only getting 51% of the stock. And they don’t like Frank Lowy hanging on as chair, after the family’s surprise dumping of the stock last year.

What happened yesterday?

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