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Are Simon and Westfield Competing or Teaming Up in Britain?

In recent weeks both Indianapolis-based Simon Property Group and Sydney-based Westfield Group divulged they had taken out significant stakes in Liberty International plc, one of the biggest shopping center owners in the United Kingdom. The question that's now hanging over both companies is whether they are pursuing a takeover of the company. And, if so, are they competitors or joint bidders.

The saga began quietly on Aug. 19 when Simon disclosed it had built up a 3.45 percent stake in Liberty International. Then, four days later, Westfield Group followed with a filing disclosing it had built a 2.96 percent stake in the company. A week ago, Simon said it had raised its stake to 4.22 percent. Neither firm is saying much on the brewing battle. Simon declined to comment. Westfield issued a statement confirming its stake, saying it bought the shares for "investment purposes," but the firm has declined to comment further.

According to at least one observer, Jason Lail, senior real estate research analyst with Charlottesville, Va.-based SNL Financial, Simon and Westfield are more likely to join forces in order to capitalize on Liberty International’s attractive valuation than to engage in an outright bidding war for the company. “Simon is definitely looking to spend some money and maybe they are getting those assets at a discount compared to what they would pay a year or two ago,” he says. “If they would go into a bidding war [with Westfield], the possibility of that is less likely.”

There is precedent for the two firms working together. In 2002 the two companies, along with Rouse Co., teamed up to buy the North American assets of Netherlands-based Rodamco in a $5.3 billion deal. In that case, the firms joined forces to outmaneuver General Growth Properties, who also was pursuing Rodamco as a takeover target. Westfield took 43 percent of the assets, Simon approximately 30 percent and Rouse approximately 27 percent. (General Growth did eventually get a measure of revenge when it bought Rouse for $12 billion in 2004.)

London-based REIT, Liberty International is an attractive takeover target as its valuation has dropped in recent months due to a slowdown in the U.K. commercial market. In the first half of 2008, Liberty’s profit fell 17 percent, to approximately $101 million, because of debt, higher interest charges on new investments and administration expenses on new development.

Liberty International owns more than 12 million square feet of shopping center space in the U.K. through its Capital Shopping Centres arm, including such prime assets as Victoria Centre in Nottingham and Braehead in Glasgow. Liberty reported a 98.7 percent occupancy level across its U.K. retail portfolio in the first half of 2008. In addition, the company features a debt-to-assets ratio of 46 percent and has no significant loans coming to maturity until 2011. Aside from its U.K. retail properties, Liberty operates more than 7 million square feet of space through its Capital & Counties arm. The division includes office and residential properties and retail centers based outside of the United Kingdom.

Both Simon and Westfield already own some properties in Europe. Westfield entered the United Kingdom in 2000 and owns 7 properties there totaling more than 4 million square feet. It is also developing Westfield London, a 1.6-million-square-foot retail center in west London and a 1.9-million-square-foot mixed-use center in east London that will be located next to the 2012 Olympic Park. Meanwhile, Simon owns more than 15 million square feet of retail space throughout the world including regional malls in Italy, Poland, France and China; and outlet centers in Japan, Mexico and South Korea, but nothing in the United Kingdom.

“While the [U.K.] market as a whole may not be doing that well, Simon is not going to have that many bidding competitors and maybe they are picking Liberty’s assets up at a bit of a discount,” says Lail.

Commercial property operators in the U.K., as well as most of their counterparts in continental Europe, have been under the same strain as U.S. owners in the aftermath of the credit crunch, with less availability of credit amid declining property values, cited a June 2008 report from global brokerage firm CB Richard Ellis.

“We believe an imminent fall in distributable earnings could lead to a reduced dividend in the absence of a contribution from capital,” wrote Steve Bramley-Jackson, analyst with Credit Suisse, in an Aug. 8 note on Liberty International.

--Elaine Misonzhnik

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