Hammerson PLC’s (LON:HMSO) £3.4bn offer to buy rival retail real estate investment trust (REIT) Intu Properties “makes sense” but could raise possible competition concerns for regulators, analysts at Liberum said.
The proposed deal will create one of the UK’s largest shopping centre operators with a £21bn portfolio of retail developments across Europe.
Liberum said since the combined group will own 13 of the top 20 ranked shopping centres, it may struggle to gain approval by the Competition and Markets Authority.
CMA approval will depend how the regulator perceives the retail market, Liberum said, noting the “polarisation towards destination shopping centres, online disintermediation and a wide and deep retail property market”
Third party offer for Intu possible
Still, Liberum said Hammerson has made a “good start” to securing the business as it has received irrevocables and letters of intent relating to 50.6% of the issued share capital in Intu.
The broker thinks it is a “sensible combination” and estimated cost savings from the deal should add about 5% to pre-tax profits of the merged group.
Hammerson estimates pre-tax cost synergies of about £25mln per year in the second year following completion of the takeover. It expects the deal to be accretive to earnings in the first full financial year and will take a one-off cash cost of £40mln for the integration of Intu.
“We believe scale increasingly matters in retail REIT ownership and in this respect the combination makes sense and we would back Hammerson's management to deliver its targeted savings,” Liberum said.
“We also believe Hammerson has a good track record in delivering operational and financial savings to increase earnings efficiency and we see lots of potential in Intu.”
Hammerson’s offer of 253.9p per share represents a 28% premium to Intu's closing price on Tuesday but a 34% discount to the last reported European Public Real Estate index net asset value.
"Intu shares were down over 25% in the year to date before the announcement so it’s an opportunistic buy," said Jasper Lawler, head of research at CMC Markets.
"Intu share prices losses have accelerated on signs British shoppers are tightening purse strings."
Brexit and tough competition hits retailers
The retail sector has also been under pressure as consumers have been squeezed by higher inflation, reflecting a slump in the pound since the UK voted to leave the European Union.
Tough competition from online rivals, including Amazon, has added to the strain on bricks-and-mortar retailers.
“The cost of living squeeze on UK consumers from higher inflation is forcing companies like Hammerson and Intu into action," said Lawler.
“Shareholders will want to see assets sold down in the merged company to help fund the deal and to reflect the lower demand for brick and mortar stores.”
Hammerson is to sell £2bn worth of its property portfolio to support “higher return opportunities”, and on Wednesday said that it was selling its stake in Saint Sébastien shopping centre in Nancy, France to AEW Ciloger.