Two of Britain’s biggest shopping centre owners are merging in a £3.4bn deal that will bring some of the UK’s top malls in London, Birmingham and Manchester under single ownership.
Hammerson said today that it has made an agreed bid for Intu, the former Capital Shopping Centres that was spun out of Liberty International, the British property portfolio of South African tycoon Donald Gordon.
Big takeovers are sometimes a sign of buoyant trading conditions. They can also be triggered by weakness as an opportunistic buyer swoops on a rival in trouble. A third variant, which this deal most resembles, is the ‘two drunks propping each other up’ scenario - a merger of two businesses struggling in an increasingly hostile environment.
The scale of the challenge facing bricks and mortar retailers was highlighted this week by the first sales figures to emerge from the recent Black Friday sales events.
Retail watchers said Black Friday had failed to dispel the gloom hanging over Britain’s High Streets. Although retail sales rose by 0.6% in November, growth was driven completely by food and online sales. Non-food sales in traditional shops continue to decline.
It's also looking like Black Friday sales have simply cannibalised spending from other shopping days. Consumers are still keen to bag a bargain but they are not being tempted to buy more than they would have anyway - at a fuller price.
This is bad news for retail chains, but it is also clearly a problem for the owners of the shops themselves (which tend not to be the retailers but specialist real estate businesses).
The terms of the Hammerson/Intu deal underline the financial pressures facing the owners of even prime shopping centres, which had been thought to be more insulated from the online threat than smaller High Street shops.
Hammerson’s offer for Intu is pitched at a 28% premium to Intu’s share price at yesterday’s close before the deal was announced. That sounds good until you realise that Intu’s shares were valued at a 51% discount to the book value of its assets.
Intu’s shares were trading at less than the value of its shops because stock market investors did not believe those values were realistic. The fact that more than half of Intu’s shareholders have already agreed to Hammerson’s approach suggests the market was right.
The market’s harsh assessment of the value of Intu is not company. Hammerson also traded at a big discount to net assets yesterday - of 27%. Both companies have been victims of the massive disruption sweeping through the retail sector.
The UK is particularly vulnerable to these fundamental changes to the way we shop. As a nation, we have embraced online shopping with more enthusiasm than most.
This may reflect the fact that we are a relatively small, congested island where getting to the shops and finding a parking space is simply harder work than in bigger countries like the US or Australia. The compact nature of the UK market also makes it easier for the likes of Amazon to make deliveries in a cost-effective way.
So what does this mean for investors? It probably means that traditional retailers, especially those without an effective online strategy, will continue to struggle. And so, too, will the owners of retail property portfolios.
Shares in Hammerson have fallen from over 700p to 534p in three years. Intu’s have fared even worse, sliding from 376p to 199p over the same period.
The actions of speculative investors placing bets against the value of the sector suggest the pain could be felt for some time to come. The volume of so-called short positions (where investors borrow shares to sell them in the hope of buying them back more cheaply in future) have increased sharply this year.
By contrast, the disruptors are more in favour than ever. Shares in Amazon have quadrupled over the past three years.
Of course, there is no guarantee that this divergence in fortunes will continue. Contrarian investors may at some point decide that the good news for online retailers is all in the price while the sell-off of the old-world shops and property companies has gone too far.
That moment does not seem imminent.
The fund on our Select 50 list of preferred funds that has most clearly backed the online retail revolution is James Thomson’s Rathbone Global Opportunities Fund. His top ten holdings include Amazon, Visa and Paypal, all major beneficiaries of this theme.
Amazon is also a top ten holding in the JPM US Select Fund, also on our Select 50 list.
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