Two years on, the deal that never was: Hammerson and intu

Two years ago, on 25 April, a line was officially drawn under a planned purchase by Hammerson of intu, a deal that months earlier had been described by bosses at the listed landlords as delivering “real value”, being an “exciting milestone” and creating “a more resilient, diversified and stronger group”. Today, analysts covering the two shopping centre owners use markedly different terms to describe the aborted acquisition. For Hammerson, pulling its recommendation of the deal “was a lucky escape,” says Robbie Duncan, real estate equity research director at Numis, adding that a tie-up with intu would have “ripped it apart from the inside out”. Over the two years since the transaction was scrapped, neither company has covered itself in glory in the eyes of the public markets. Another takeover deal for intu, from a consortium including deputy chairman John Whittaker, failed and the company has been unable to raise the equity necessary to repair a battered balance sheet. Hammerson has faced troubles of its own – a £400m deal to sell a portfolio of retail parks currently hangs in the balance. Hammerson’s share price has plummeted by about 90% during the past two years, with its market capitalisation of about £446m suggesting a business viewed by investors as “wounded”, in the words of Cedrik Lachance, Green Street Advisors’ head of REIT research. Intu’s shares have plunged by 97% over the same period and have now been well below 10p since the start of March. Its market cap of £66m is little more than “a rounding error”, Lachance says. Equity analysts now fear what the continuing coronavirus crisis means for two businesses that had already been beaten down by the changing face of retail – and what it means for their outlook on the real estate market. Structural decline There was a certain logic to a Hammerson and intu marriage, says Hoong Wey Woon, a real estate partner at corporate finance firm Alantra. “Retail has changed exponentially quickly over the last three years and every single retail group has struggled to keep up with it,” he says. “The ability to have brought down their debt borrowing across the group and maybe sold off their non-core assets before the market got really bad would have made sense.” And yet most analysts believe an enlarged group would still have run into trouble in the years since a tie-up could have taken place. “Would a larger, single company have been any better positioned? In short, no,” says Kieran Lee, an analyst at Berenberg, which has a 1p share price target on intu but does not cover Hammerson. He describes a state of “general structural decline” for the retail industry, which some big landlords have failed to adapt to. “Whether you’re Hammerson or you’re intu, the decline in UK retail has been huge,” Lee adds. “You only have to look at companies like Unibail-Rodamco-Westfield, which have reported significant valuation losses across their UK portfolio. It is not a company-specific issue, but company actions haven’t necessarily helped.” At Numis, which has a share price target of 45p for Hammerson and zero pence for intu, Duncan sees even tougher times ahead for such landlords as the coronavirus pandemic and UK lockdown bite. “I am cautious on the economic outlook – I think it’s going to be a long, slow, gentle recovery,” he says. “Because of that, anyone who is targeting the discretionary end of the consumer spending piece is going to be struggling for quite some time.” Poor rent collection figures for the March quarter will likely look far better in hindsight when figures for June arrive, he adds, by which time retail landlords will have had three months with little to no income. Intu collected just 27% of rents in Q1, compared with an average quarterly rental collection of 77%. In income terms, that means it collected £48m less rent in the first three months of the year than it would ordinarily. Hammerson collected 37% of its retail rents during the quarter – just £28.5m. And once the crisis passes, Duncan questions whether people will ever return to how they shopped in the past. “Consumer habits will change [after the pandemic],” he says. “The cynics and sceptics saying certain parts of the retail market won’t ever go online will be proven wrong. What Covid-19 is doing is driving that in the mind of the consumer… when we start to normalise, I think it will have a lasting effect on consumer psychology.” Buyers be where? Where does this leave the future of Hammerson and intu as publicly traded companies – and possibly M&A targets? An equity analyst at a European bank, speaking anonymously, says he sees little chance of intu still being a listed company by the end of this year. Either a “brave individual” – he singles out Whittaker – makes a bid, he says, or the company enters administration. Hammerson could still be a takeover target, he adds, but given that the board rejected a £5bn approach from France’s Klepierre in 2018, he sees it as unlikely to recommend a lower offer to shareholders now. Private equity funds may be watching, says Lee at Berenberg, but he questions whether any would make a move for a listed landlord now, “cognisant that Covid-19 is going to present an awful lot more financial distress, and you may be able to pick up the assets a lot cheaper from an administrator in three, four, five, six, 12 months’ time”.   To send feedback, e-mail tim.burke@egi.co.uk or tweet @_tim_burke or @estatesgazette