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South Africa: Intu’s debt ball and chain is likely to deter potential buyers

By David Whitehouse
Posted on Friday, 8 November 2019 09:47

The Trafford Centre shopping mall in Manchester is a key asset for struggling Intu Properties. REUTERS/Phil Noble

Deep pockets will be needed for any prospective purchaser of Intu Properties, the South African owner of shopping centres in the UK and Spain, which has seen its shares lose more than two-thirds of their value this year.

The company has 17 shopping centres in the UK and four in Spain.

Matthew Roberts, Intu chief executive since April, says that the company is in the advanced stages of selling two of its Spanish assets, and is also likely to need to raise equity. The number one priority is to fix the balance sheet as a debt maturity approaches in 2021, he said in a trading update on November 6.

  • “Intu is definitely a potential takeover target with Sovereign Wealth funds or private equity investors the potential buyers,” says Richard Hasson, co-head of Electus Fund Managers in Cape Town.
  • The company has not diversified in the same way as some of its peers, he says, which will make a sale of assets harder, as there have been very few transactions in the UK for super-regional shopping malls.

The end-June debt level of £4.8bn and a loan to value ratio of 57.6% are “very high” in the context of a market value below £500m, Hasson says.

To get the loan to value ratio below 50% would require asset sales and/or an equity placement in the range of £300m to £500m pounds, implying a rights issue in the area of one new share for every share held.

That would be highly dilutive for existing shareholders. “The high debt levels are certainly the key risk,” Hasson says.

  • Even if Intu shareholders were offered a 50% premium to the current share price, the purchase price of £600-700m would be small relative to the debt, he says.

E-commerce, Brexit

Most investors are “certainly not yet looking to buy retail assets in developed markets,” especially in the UK, says Craig Smith, head of research and property at Anchor Stockbrokers in Johannesburg.

  • Intu shares have been hammered as a result of Brexit, the impact of e-commerce on UK retailing, declining property values and high debt levels, Smith says.
  • There is a need for more capital expenditure to introduce more leisure and entertainment retailers to make shopping centres “more desirable for consumers,” he says.

“Divesting depreciating assets is a desperate route,” says Hong Kong-based equity analyst David Blennerhassett, who publishes his research on SmartKarma.

  • He notes that the valuation of the company’s Spanish investments appears stable – but the company’s malls are concentrated in the UK.
  • The decision by Brookfield Property to walk away from talks to take over Intu in November 2018 now looks like an “astute move,” he says.
  • At current levels of around 0.1 times book value, speculation of a takeover is unsurprising, Blennerhassett says. But the need for asset disposals and new equity suggests that any interest from suitors would be “more a rescue deal than a takeover.”

Bottom Line: Intu looks vulnerable to an opportunistic low-ball bid below the current stock price. Existing shareholders should get out while they can.

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