Unibail and activist investors grapple over how to steer a firm through the pandemic
The stage is set for a November 10 showdown between Unibail-Rodamco-Westfield (URW), Europe’s biggest property owner, and a consortium of minority shareholders hoping to radically rework the firm’s strategy. Specifically, the activist investors oppose the €3.5 billion capital raise which is a central element of the RESET plan drawn up by URW to reinforce its balance sheet amidst pandemic-induced uncertainty and tough times for the retail sector. The shareholders opposing the capital raise, headed by URW’s own former CEO Leon Bressler and French billionaire Xavier Niel, only have a combined 4.1% stake in the commercial real estate firm—but are embarking on a no-holds-barred campaign to pick up the 35% support they would need to quash the rights increase.
To curry favour with fellow shareholders, Niel and Bressler have put forward an alternative plan dubbed REFOCUS, which calls for URW to reduce its debt burden by selling off its portfolio of high-end shopping centres in the United States. As URW and the activist investors have laid out their competing visions for how to safely shepherd the company through the unprecedented economic downturn which is hitting the retail sector particularly hard, the dispute has showcased how activist investors’ interests often diverge from those of other shareholders.
A tale of two strategies
Both UWR’s management and its activist shareholders agree that the firm needs a strategic shift to carry it through the current economic downturn; dramatically decreased footfall in shopping centres around the world has taken a chunk out of UWR’s stock market valuation, as it has for most companies in the retail sector.
The company’s supervisory board and the consortium of shareholders helmed by Bressler and Niel, however, have drastically different ideas of what interventions would best preserve shareholder value. The RESET plan put forward by UWR’s management conforms to conventional wisdom of how to manage a crisis—its priorities line up precisely with what investors profiled in a recent BCG survey recommended companies do in the face of Covid-19 , namely bolstering the balance sheet, preserving liquidity and focusing on long-term growth. The plan is anchored by the €3.5 billion capital raise, €4 billion in asset disposals over the next year, and another €1.8 billion in savings, which the company argues would allow it to deleverage while preserving its strong investment-grade rating, essential to refinancing the substantial amounts of debt which UWR has maturing over the next 5 years.
The major credit rating agencies have concurred that without the equity raise, the firm would likely face a ratings downgrade. For their part, however, Niel and Bressler have argued that maintaining the company’s good credit rating is not a priority, that the firm has adequate liquidity without the €3.5 billion capital increase, and that URW should instead reduce its debt burden by divesting itself of its US assets—though analysts and credit rating agencies alike have noted that selling prime real estate at the moment is no easy feat—and position itself as Europe’s premier shopping centre operator.
Divergent interests with a different tolerance for risk
At first glance, it seems that the plan put forth by Niel and Bressler is simply based on faulty assumptions. The activist investors seem to consider URW’s €3.4 billion of cash on hand and €9.3 billion in lines of credit as equivalent, though the latter need frequent refinancing, the terms of which depend on the company’s credit rating.
Niel and Bressler’s claim that the 2018 acquisition of Westfield “polluted URW’s dominant position in Europe with a more marginal position in the US” glides over the fact that the principal value of Westfield’s American assets is not a dominant market share, but rather their prestige and high-end locations allowing them to prosper in a tricky retail environment. Analysts have raised particular red flags over this haste on the activist investors’ part to jettison US assets, warning that this “exposes the company to quite some execution risk” and raises the chances that the company could be forced to raise capital or offload assets later under less favourable conditions, given that there is no certainty that URW could net a fair price for the shopping centres amidst a global pandemic and economic downturn. What’s more, pulling out of the US market and concentrating solely on Europe would leave the firm more exposed as fresh waves of the coronavirus pandemic hit regions unevenly.
Niel and Bressler are understandably willing to take on this higher level of risk, however, because their interests as activist shareholders—to secure board seats for themselves and to send URW’s share price soaring, no matter how temporarily—diverge sharply from other stakeholders’ interest in setting the company up for long-term growth in a retail environment whose transformation has been accelerated by the pandemic.
Activist investors’ appetite for risk dangerous in a crisis
This willingness to adopt a risky and unconventional strategy in hopes of a short-term stock market boost is not unique to Niel and Bressler, but is a hallmark of the activist investment which has increasingly become a part of the corporate landscape. According to data from investment bank Lazard, companies faced more activist investors in 2019 than ever before; 2020 was on track to be a banner year for activist investors before the first wave of the coronavirus pandemic temporarily took the wind out of their sales.
Activist investors and some analysts have cheered this rise in activism by pointing to statistics indicating that their radical change they agitate for can sometimes yield lucrative results. Others remain wary; the Harvard Business Review wrote that they remain unconvinced that activist investment “is a positive trend [for] corporations and the economy; in fact, we find that it reinforces short-termism and excessive attention to financial metrics”. This myopic focus on short-term results and individual metrics like stock prices is particularly dangerous in the midst of a crisis, as the flawed Niel/Bressler plan illustrates.
This article does not necessarily reflect the opinions of the editors or management of EconoTime