Home Intu faces tough task to be in better shape for investors
August 12, 2019
It should be the sale of the century. Prime goods sold off at a more than 80 per cent markdown. But, as often when something looks good in the summer sales, the shiny malls of UK shopping centre owner Intu are not worth the risk even at knockdown prices.
The decline of Intu has been as drawn out as it has been predictable, even if the precipitous fall in its shares in the two weeks since a poor set of results suggests worries are accelerating.
To recap: as the owner of large regional shopping centres, Intu is badly exposed to problems on the UK high street, with retailers going out of business or looking to cut their rent bills. Two takeover bids have come and gone, while management has been stuck behind the counter as markets have deteriorated.
Meanwhile, the stock has halved in the past month to give a market capitalisation of less than £500m — equating to a discount to the net value of the company’s properties of more than 80 per cent.
The falling stock has even passed the 44p price target of bearish Jefferies’ analyst Mike Prew. This, for the property sector, is like the people with clapboards declaring the end is nigh suddenly finding out not just that they were right but that the end happened half an hour ago.
The big question is whether property investor John Whittaker, who owns 27% of Intu through Peel Holdings, will commit further money to support the group
The question now is as simple as survival. But even this may not be straightforward given high levels of net debt at £4.7bn — nearing covenant breaches if prices continue to fall, with the need to start refinancing work in two years.
Intu’s properties have lost £872m in value in six months. Net rental income is down almost a fifth. Cash hoarding has started, with the dividend frozen — which will mean a tax charge.
The business needs to service debt and invest in properties and it wants to start developing more residential and flexible office space. But these markets are suffering too outside London. The balance sheet has some nasties lurking on it — unallocated interest rates swaps from previous financings show up as a liability of £183.6m.
Cash raising will need to come next. But there is no guarantee that the debt markets are open to Intu on anywhere near decent terms. The equity markets are also difficult for an emergency rights issue given the shares are trading at such a steep discount and the lack of confidence in UK retail.
Fundraising would be helped by any sign that the retail property market is nearing its bottom, but that seems unlikely for some time. This week alone, the British Retail Consortium declared July to be the worst on record, while Jack Wills was snapped up by Sports Direct and Karen Millen was bought by Boohoo — an online business with little regard for high street stores.
Under new chief executive — and former chief finance officer — Matthew Roberts, Intu wants to sell assets to fix its balance sheet, with talks ongoing on its Spanish properties. It is then likely to turn to some of its better UK shopping centres. But buyers know they can drive a hard deal in an already weak market. In April, Intu sold half a mall in Derby to a Kuwaiti investment firm for £186m. The deal was structured to give the buyer a guaranteed proportion of dividends, leaving the risk with Intu. This is the best sort of financing it can find right now, says Mr Prew.
The big question is whether property investor John Whittaker, who owns 27 per cent of Intu through Peel Holdings, will commit further money to support the group. With Canada’s Brookfield, he was part of a £2.9bn take-private offer for Intu last year, and could still prove saviour in an equity raising or kingmaker in a takeover should the sum of Intu’s parts attract another dollar-based opportunistic buyer.
There are good assets under the debt. A swift sale of its Spanish real estate could yield a price nearing its existing market capitalisation, giving the group financial headroom to consider a rights issue. And people are likely to continue to head for shopping malls at the weekend: Intu owns nine of the UK’s top-20 shopping centres. But those centres will need to be smaller and redesigned for younger customers seeking experiences rather than cut price T-shirts. Like its centres, Intu needs to be restructured, rethought and, as soon as possible, brought back to a fit shape for investors.