$25 Billion Says the US Shopping Mall Isn't Dead Yet

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Stratford, a suburb to the east of London, sums up the conundrum facing mall owners. On one side of this bustling transport hub is the gleaming Westfield mall. On the other a smaller, scruffier, shopping center.

With the rise of online commerce, retailers are rationalizing their store portfolios. Their shops are now showrooms for their wares as much as trading outlets. So they prefer them to be in large fancy destination malls, with the full dancing show of entertainment and services, rather than the drabber local variety.

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Unibail-Rodamco SE, a French property company that’s listed in the Netherlands, has gone on a spree of its own, spending about $25 billion for the equity and debt of Australian developer Westfield Corp.

The logic appears sound. As malls fight against the wave of online retail, their best chance of survival is big, well-kept centers that give consumers a reason to visit. That might be to pick up parcels at click-and-collect points, or to eat in a restaurant or catch a movie, as much as to shop.

Bigger scale should give the combined group more clout with shop-owners too. That’s handy at a time when retailers are trying to squeeze better rental terms because of tougher markets.

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This explains why Unibail-Rodamco has offered what seems a pretty fair price. Westfield’s billionaire founder Frank Lowy certainly seemed happy enough.

The cash and stock offer values each Westfield share at about $7.41, roughly a 16 percent premium to Westfield’s last price in U.S. dollars, and not too far off last July’s five-year high. So Westfield shareholders, including the Lowy family, aren’t doing badly.

For Unibail-Rodamco shareholders, though, this mega-mall deal isn’t without risk.

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First, $118 million of synergies looks punchy. Some $71 million will come from cutting corporate overheads: Primarily from the Westfield management team stepping down on completion of the deal. Another $47 million will come from shared savings in areas such as leasing and advertising.

Second, some 70 percent of Westfield’s 2016 revenue came in the U.S., according to Bloomberg data. While Unibail-Rodamco says it will be present in the wealthiest U.S. cities, Americans aren’t the mall rats they once were. Selling the lower quality assets will be difficult, and will take time.

The final note of caution is the willingness of the Lowys to sell now. While they will keep a stake worth about $1bn, Westfield has built and managed its assets well. Unibail-Rodamco has a tough act to follow.

Despite all this, you can see why Unibail-Rodamco would snap up Westfield. It’s by no means getting a bargain. But if you’re going to stick with the mall business, at least these are the meccas of shopping.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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