Low rates underpin $22 billion shopping centre merger

The merger WILL cost money to implement. Low interest rates are a major force behind the $22 billion merger that shopping centre owner Federation Centres has negotiated with Novion, the internally managed reincarnation of CFS Retail Property Trust.
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Federation emerged from the ashes of one of Australia’s biggest global crisis casualties, Centro, and will implement the new merger by issuing securities to Novion including Novion’s 21.6 per cent shareholder, the Gandel Group, which supports the deal.

Ownership of the merged group will split 64 per cent – 34 per cent in favour of Novion’s security holders, reflecting the fact that Novion is contributing assets of $14.9 billion compared with Federation’s $7.3 billion.

Both sets of investors are promised longer-term gains, however, as the group extracts merger savings and debt service savings.

The combined operation’s $22.2 billion asset base will make it the second largest retail shopping centre manager behind Scentre, the former Westfield Retail Trust.

It will be an ASX top 30 stock, with a market capitalisation of over $11 billion, and will have a national retail footprint, led by Victoria (44 per cent of the combined portfolio, including Novion’s Chadstone Shopping Centre), New South Wales (19 per cent of the portfolio), Queensland (17 per cent) and Western Australia (11 per cent).

The merged retail mix looks to be well balanced between stores that sell things shoppers need to buy regularly, and stores that sell discretionary merchandise. Supermarkets account for 33 per cent of the portfolio, and specialty stores 33 per cent. Department stores, a struggling retail category, account for only 5 per cent of the merged portfolio. Merger costs and savings

The merger will cost money to implement. The groups say that transaction costs will be $458 million, including stamp duty of $106 million, costs of $75 million taken as the merged operations are rationalised in pursuit of longer-term, repeatable savings, and debt restructuring costs of $277 million, taken as the debts of both groups are renegotiated.

There are several offsetting positives, however. Federation and Novion say that earnings will be boosted by at least $42 million a year once overlapping costs, including the groups’ two head offices, are rationalised.

Novion’s corporate costs are currently 0.39 per cent of its assets under management, and Federation’s corporate overheads are 0.55 per cent of assets. The merged group’s overheads will be 0.26 per cent of assets, the groups predict.

On top of that, debt-service cost savings that flow from the rollover of the debt both groups hold into new facilities are predicted to bump up earnings by $35 million a year.

Operational savings are to be expected in a merger of this size between groups in the same market. The financing savings underline how interest rates can be a deal catalyst.

Novion’s expected average interest rate this year on existing debt facilities totalling $3.4 billion that are drawn down by $2.8 billion is 5.3 per cent. Federation’s expected average interest rate on facilities totalling $1.7 billion that are drawn down by $1.4 billion is 4.8 per cent. The merged group expects to be able to recreate the debt at an interest rate of 4.1 per cent – and lock it in for an average of more than five years, up from 3.9 years currently at Novion, and 2.7 years at Federation.

Those debt cost savings are a crucial part of the merger maths for the two groups, and for Gandel Group, Novion’s cornerstone shareholder. The merger sums will be reinforced by the Reserve Bank rate cuts that the markets are waiting for.

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