There are so many elements to the $22 billion three-way Westfield merger but let’s first consider today’s media commentary arising from this rather detail-light 35-page announcement here.

The media has inevitably focused on the headline figures and Lowy family control but we were disappointed that no-one looked properly at the question of related party transactions and independent directors.

The Lowy family surrendering control was best analysed in this column by Elizabeth Knight in today’s SMH.

Overall, Stephen Bartholomeusz had the most thorough analysis in today’s Age.

Terry McCrann is already on side and also drew some interesting comparisons with Rupert Murdoch’s 50-year journey.

The Australian’s Bryan Frith provided a fairly pedestrian run through of the mechanics and arguments in favour of the deal.

With such a complicated deal it was not surprising that there was the odd error in today’s coverage. For instance, SMH property writer Carol Cummins wrote the following: “After 40 years of operating as an externally managed structure, with Westfield Holdings receiving fees as the manager of the listed trusts, the group will fall into the now-popular pattern of being internally managed.”

Er, no, Westfield was one entity until 1979 when then Treasurer John Howard was more than accommodating with the tax laws in allowing the Lowys to separate out the ownership and management and enjoy significant tax advantages. This was about the same time that the youthful Treasurer was allowing Larry Adler to keep his FAI Insurance licence when the regulators were calling for it to be handed in.

How will the Fairfax press handle this deal?

It will be interesting to see how the Fairfax press handles the coverage of the Westfield merger because the two independent companies have more cross-directorships than anyone else on the ASX.

Fairfax CEO Fred Hilmer is deputy chairman of Westfield Holdings and Fairfax chairman Dean Wills has been a Westfield Holdings director for 10 years.

The longest serving non-Lowy, non-executive Westfield Holdings director, David Gonski, is another member of the Fairfax board so you have the rather unhealthy situation where three long-serving directors of an often controversial property development group are also driving forces inside the nation’s most important and respected newspaper publishing company.

The Fairfax journalists know this full well. For instance, will Michael Gawenda and The Age be game enough to debate the various conflicts of interest and Westfield controversies when Fred Hilmer has just agreed to send Gawenda to Washington?

Will Michael Gill’s Fairfax Business Publications group provide fearless and rigorous coverage when this is a deal being promoted by Gill’s direct boss? It really is completely inappropriate for the CEO of major media company to sit on the board of a controversial property developer and it is at times like these when that gets highlighted.

For instance, Crikey has put more pressure on Westfield and the Lowy family about corporate governance and conflicts of interest than anyone else in recent years. Will Michael Gill’s various Fairfax publications give any grievances we raise a fair run ahead of the meetings which will not be an easy sell because they require 75 per cent approval? We doubt it because Gill is still running an informal ban on Crikey, which dates back to September 1999.

The independence of the Fairfax journalists and editors will be put to the test and we’ll be monitoring the Fairfax coverage with interest because there are many controversial elements to this deal. We doubt the mainstream will give you anything like the perspective on this deal that Crikey can and hopefully will deliver from its genuinely independent vantage point.

After all, we’ve been fighting with Frank at AGMs since 1998 and who else can claim the widespread popular appeal that saw Crikey get 0.6 per cent of the vote when running for the Westfield Holdings board in 2000? Hmmm, that was our worst result in 18 public company board tilts.

We’d be interested in hearing what sort of lines you would like Crikey to pursue on this huge deal at [email protected].

How the mega-merger works

Forget about today’s up-beat media coverage, this $22 billion property mega-merger is by no means a fait accompli. For starters, Frank Lowy requires approval from 75 per cent of all voting shares in Westfield Holdings and 50 per cent of all shareholders. With 13,000 mums and dads you can never be sure this will happen.

He also needs 75 per cent approval from units voted in the two trusts so it would only take one or two large institutions to quibble about the lack of a premium being offered to the unitholders and the whole proposal could fall over.

Under the deal, Westfield Trust and Westfield America Trust unitholders will receive 0.28 and 0.15 new stapled securities respectively for each trust unit they currently hold. Westfield Holdings is the benchmark and will maintain its existing capital structure which sees the Lowy family hold 158 million shares or 29 per cent.

There are more than 50 executives who are more than $1 million in the money on their Westfield Holdings shares and options so these arrangements presumably won’t be disturbed by the merger.

Westfield Holdings last traded at $13.96 although it has enjoyed a nice little run from $12.50 over the past month as the various boards put their finishing touches on the deal.

Westfield Trust last traded at $3.55 and Westfield America Trust at $1.96. Both have weakened by about 5 per cent over the past month – a period when Westfield Holdings fortuitously gained about 10 per cent.

It would have been nice to see some discussion of this in today’s papers.

The merger terms, based on that all important $13.96 closing price for Westfield Holdings, see Westfield Trust unitholders nominally being offered $3.90 worth of shares in Holdings whilst Westfield America unitholders are getting $2.09. However, you need to remember that Westfield Holdings trades on a much higher multiple and has an asset base (management and development contracts) which is largely being surrendered as part of this deal.

The forecast distribution for the group for the year to June 2005 is $1.03 per security so Westfield Holdings shareholders will certainly see an increased dividend flow from this deal.

By adopting the stapled security structure, Westfield would appear to be maintaining the tax advantages it enjoys at present. For instance, the proforma figures for the combined group released yesterday suggest it will generate net income of $1.75 billion in 2005, but only pay $103 million in tax on that, a rate of just 5.9 per cent.

In 2006 it is just as good with $111 million in tax payable on forecast earnings of $1.8 billion.

Wouldn’t we all love to be paying that sort of tax rate? When you also consider that there is no capital gains tax payable if the Lowys were to cash in their $2.5 billion stake, you soon realise that our second richest man is better structured to minimise his payments to the tax man than the average stiff.

Related party dealings and three sets of shareholders

At its core, this Westfield mega-merger is a massive related party transaction involving billions of dollars and three sets of shareholders with competing interests.

Each entity is currently valued at almost $8 billion on the market but the two trusts have bricks and mortar shopping centres that back this up. This contrasts with Westfield Holdings, the company which has the Lowy family wealth riding on it, which has most of its value in long term management contracts and generous development agreements.

The audited accounts reinforce this point with Westfield Holdings only claiming net assets of $1.62 billion in last year’s annual report whereas Westfield Trust claims it has $7.2 billion in net assets and Westfield America Trust reckons it has $4.82 billion as at December 31, 2003.

All three entities are audited by Ernst & Young although they have separate signing partners.

Crikey has long believed that Westfield Holdings is vulnerable because they upstream the profits out of the two trusts and could one day find themselves being sacked by institutions sick of seeing their units dramatically underperform the Lowy-controlled management and development company.

For instance, Westfield Trust unitholders paid a whopping $82.6 million to Westfield Holdings in management fees last year and that is before considering the fat profit margins that are paid on shopping centre redevelopments.

Under this proposal, unitholders in the two trusts are effectively being told to surrender some of their bricks and mortar in return for Westfield Holdings surrendering their lucrative management and development contracts.

In other words, the Lowy family shareholding is becoming a lot less risky because they will finish up owning about 11 per cent of the world’s biggest shopping centre portfolio rather than the more precarious situation of having long-term agreements to operate these same centres and take fat fees in the process.

Do the owners of the centres really want to give away 30 per cent of their value to their management company. That sounds like an awful lot, especially when dealing with less risky fully developed centres.

This is one of the central themes that will be argued about long and hard in the coming weeks as analysts crunch the numbers.

What about board control and corporate governance?

When you are dealing with such a huge related party transaction, it was disappointing that no Westfield “independent” director presented at yesterday’s briefings.

And while the presentation laid out the management structure, there was no mention of the future board. If the Lowy family owns only 11 per cent of the expanded group it really is time that Frank Lowy stood back and allowed an independent chairman to be appointed. After all, two jobs must be very taxing for a 73-year-old.

Disney and McDonalds have both separated the role of CEO and chairman in recent weeks so why can’t Westfield do the same and show it believes in good corporate governance?

The combined entity should also have a clear majority of independent directors. On some measures there is not a single independent director on the Westfield Holdings board because they’ve all been there for donkeys years and had some various commercial dealings with the group.

Fred Hilmer was a consultant to Westfield before he became Fairfax CEO, Carla Zampatti has stores in their centres, Dean Wills was chairman of Axa which had large joint ventures with Westfield, David Gonski is a long-time corporate adviser to Westfield (his firm is advising on this deal) and Rob Ferguson was managing director of BT when it was the second largest shareholder in Westfield Holdings after the Lowy family.

There are some independent directors on the two trusts and presumably we’ll be hearing from them in coming weeks about whether this deal is fair or not. Ousted Telstra chairman Bob Mansfield is one of the Westfield America independents along with former Network Ten chairman John Studdy, Jillian Broadbent (who shares several cross-directorships with other Westfield directors) and three Americans – Frank Vincent, Roy Furman and Herman Huizinga.

Westfield Trust has some common directors with the other two vehicle and its only independent directors from the rest of the group are GPG’s Gary Weiss and New Zealander Bill Falconer.

We wonder how much input the various non-Lowy directors had in “negotiating” this complex three-way merger?

Lowy and Murdoch – a study in contrasts

There are two very important distinctions between the corporate restructuring being proposed by Rupert Murdoch’s News Corporation and Frank Lowy’s Westfield Group.

Firstly, Lowy is determined to preserve the capital gains tax holiday he enjoys on his $2.5 billion stake in Westfield Holdings. That is why there is no change being proposed in the shareholdings of Westfield Holdings, which is 30 per cent owned by Lowy – a stake that dates right back to 1960.

Instead, unitholders in the two trusts will simply be issued new shares that will rank equally with Westfield Holdings and effectively be stapled together.

And why would you surrender upside which is capital gains tax free? This is one of the puzzling aspects of the News Corp proposal and one of the reasons why Australian institutions might well choose to vote it down. Why would AMP approve something that means it would have to pay capital gains tax on any future appreciation of News Corp shares it has held pre-1985.

Speaking of capital gains tax holidays, Frank Lowy will have an incentive to accumulate his wealth through capital gains rather than dividends so payout ratios will be an interesting thing to watch after the merger because the trust unitholders are used to big distributions.

The other important difference with Rupert Murdoch is that Frank Lowy is not hiding behind cute corporate structures to preserve control over Westfield Group. Under this proposal, the Lowy family holding will fall to about 11 per cent and institutions or shareholder activists like Crikey will have a much better shot at getting a clear majority of independent directors on the board.

Rupert Murdoch is maintaining the farcical situation where 65 per cent of News Corp’s equity capital is not allowed to vote and he controls 30 per cent of the rest, thereby ensuring nothing happens without his say so even though his economic interest is down to just 15 per cent.

Murdoch is also running off to a jurisdiction in Delaware where you need 85 per cent approval from voting shareholders to change control.

The News Corp proposal looks like it is partly motivated by dynastic considerations whereas this Westfield proposal will make the Lowy family vulnerable to takeover or shareholder revolts, but their financial performance has been so good over the years that they are unlikely to be thrown out in the foreseeable future.

Is there an adviser not working for Westfield?

We just loved this conclusion to the Dow Jones wire story on the Westfield merger:

“Deutsche Bank, UBS and Grange First Provident are joint lead advisers on the transaction. Other advisers include ABN AMRO, Merrill Lynch, JP Morgan, Carnegie Wylie, Investec Wentworth, Citigroup, Goldman Sachs JBWere, Credit Suisse First Boston and Morgan Stanley.”

Has anyone ever heard of deal in which nine of the world’s 10 biggest investment banks all have a gig, along with two better known boutique corporate advisory outfits?

Is Frank Lowy trying to take all the talent out of play, such that if someone wanted to run a spoiling campaign there would be no credible big name to run with?

Hopefully they’ve all been assigned to the various different interested parties because when dealing with three different boards and shareholders you have a lot of negotiating to do.

With so many advisers involved it is truly remarkable that news of the merger did not leak before the official announcement.

Market applauds Lowy’s Westfield merger

From the April 24 sealed section

Frank Lowy has comprehensively proved doubters such as Crikey wrong today after shares in all three of his Westfield property vehicles soared in response to his mega-merger proposal when trading resumed this morning.

IBy the close of trade, investors had added $2.33 billion or 10.23 per cent to the value of the Westfield empire which is now worth $25.11 billion. A total of $963 million worth of shares changed hands.

Westfield Trust and Westfield America trust both soared to record highs while Westfield Holdings rose more modestly, suggesting that the market believes the Lowy family is offering a reasonable premium to the two sets of unitholders in the trusts.

Westfield Trust, the Australian and New Zealand arm, traded in a range between $3.98 to $4.30 and finished 54c higher at $4.09 in heavy trade of 91.3 million units worth $373 million.

Westfield America ranged between $2.13 and $2.35 and finished 24c higher at $2.20 in heavy trade of 134.7 million units worth $296 million.

Westfield Holdings, which is 29 per cent owned by the Lowy family, ranged between $14.13 and $14.68 to finish 46c higher at $14.42 in trade of 20.4 million shares worth $294 million.

Given that this is one big related party transaction with three different sets of shareholders, it is worth looking specifically at the movements in percentage terms and market capitalisation which were as follows:

Westfield Trust: up $1.164 billion in value or 15.21 per cent to $8.82 billion.

Westfield America Trust: up $906 million or 12.24 per cent to $8.31 billion.

Westfield Holdings: up $260 million or 3.3 per cent to $7.98 billion.

Westfield Trust has 2.156 billion units on issue and the lucky substantial shareholders include NAB with 142 million units, Lend Lease with 137 million, AMP with 131.3 million and Macquarie Bank with 110 million.

Together these four institutions own 520 million units or 24.2 per cent of the total so if the four of them approve the merger then you can expect it will be approved by Westfield Trust unitholders as a whole. Collectively these four insto have enjoyed a paper gain of $281 million today alone.

The Westfield Holdings share move was the most modest and part of this was undoubtedly driven by the movement in Westfield America units because Westfield Holdings owns 554 million of the 3.7757 billion Westfield America units on issue or 14.67 per cent of the total.

This stake rose in value by $133 million which equates to about 23.5c cents a share for Westfield Holdings.

After Westfield Holdings, the largest institutional shareholders in Westfield America are the Commonwealth Bank with 264.16 million, followed by NAB with 191.76 million, AMP with 183.87 million and Macquarie Bank with 183.85 million.

Therefore the top 5 shareholders in Westfield America control 1.377 billion units or 36.46 per cent of the 3.7757 billion on issue. Their collective profit was $330 million today.

Whilst this reaction suggests shareholder approval should not be a problem, voting on this deal could be a classic example of the conflicts of interest that develop when you allow major banks to control Australia’s funds management industry.

Westfield is claiming that it will be able to save almost $100 million in interest a year by combining its $14 billion debt under the one roof. Wouldn’t NAB, CBA and Macquarie Bank love to get a big slice of what will probably be one of the biggest debt restructuring deals of the year.

Let’s hope the prospect of lucrative banking deals won’t effect the way these “independent” fund managers vote their shares on these deals.

Why did Macquarie Bank miss out?

What’s wrong, stop the money machine, Macquarie Bank’s name is missing from the cast of thousands advising the Lowy family-dominated Westfield Group of trusts in their grand $25 billion related-party transaction.

The advising team included JB Were Goldman Sachs, ABN Amro, the well-connected Carnegie Wylie, Merrill Lynch, JP Morgan, Investec, Credit Suisse, Morgan Stanley, Citigroup with Deutsche Bank and UBS among the lead players . But no “Millionaires’ Factory.”

Oh dear, questions will be asked. But with a plethora of trusts and other structured investment of their own, perhaps the term ‘conflict of interest’ registered somewhere and prevented the Macquarie boys from bidding heavily for the business, despite Chinese walls and all?

This is most unusual for the biggest player in the Australian market to be missing from the biggest deal of the year. Then again, maybe it reflects the fact that Macquarie Bank has recently become a substantial shareholder in both Westfield Trust (110m units or 5 per cent) and Westfield America Trust (183.86m or 5.01 per cent).

Both moves were fortuitious as the Westfield Trust substantial notice was lodged on January 15 this year and the Westfield America trust notice on February 24.

We’re not for a moment suggesting Macquarie had some sort of inside run on this deal but it is ironic that convicted insider trader and former Macquarie Bank executive director Simon Hannes used to advise Westfield on some of its big deals.

Whilst the media is talking about the Lowy abandonment of external management putting pressure on the Lend Lease/GPT structure, there is an even bigger conflict of interest still out there and that involves Macquarie Bank’s tollroad shoot.

If the world’s biggest retail property group is internalising management, shouldn’t the world’s biggest tollroad company, Macquarie Infrastructure Group, do likewise?

The trick for the Millionaire Factory will be persuading MIG to pay for the internalisation, which is what Frank Lowy has done with his Westfield merger. However, Macquarie Bank can’t exactly merge with Macquarie Bank which has ripped more than $500 million in fees out of MIG since it was floated in the late 1990s.

Peter Fray

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