Retail therapy: two of Britain's biggest commercial landlords set to merge

Shaftesbury and Capital & Counties, two of London’s leading leisure landlords, are planning to merge – if they can get the deal past regulators. Matthew Partridge reports

London landlords Shaftesbury and Capital & Counties (Capco) are in advanced talks to create a real-estate group that covers many of London’s “hottest spots” including about 2.9 million square feet of space in the West End, says James Ludden on Bloomberg.

Under the provisional terms of the all-stock deal – the details of which are still being finalised – Shaftesbury would own a slight majority, estimated at 53%, of the combined group. The combined company could be worth about £3.6bn based on current market values.

The merger comes as shares in both companies “continue to trade well below their pre-pandemic levels”, says Louisa Clarence-Smith in the Times. Investors have been worrying that “footfall would never be the same again”, due to the lingering effects of Covid-19 and competition from online retailers, and both stocks trade at depressed valuations.

Capco is at a 27% discount to net asset value, while Shaftesbury is at a 7% discount. Yet there are signs that conditions are improving. Sales at sandwich chain Pret A Manger beat pre-pandemic levels in the West End in March, and overall customer sales among Capco’s retail clients reached 2019 levels in February.

A stronger negotiating position

Still, the outlook is uncertain, says Iain Withers and Andres Gonzalez on Reuters. “While people have been returning to London’s offices and shops, the… capital has recovered more slowly from lockdowns than other British cities, with more people swerving lengthy commutes into the city centre by continuing to work from home.” Analysis by Centre for Cities puts London at the “bottom of a list of 63 cities monitored by the group” with weekly footfall still down by a third. In such an environment, a merger could help both groups by helping them cut overheads and strengthening their negotiating power.

It’s true that a combination “makes some sense”, says Lex in the Financial Times. But investors are yet to be convinced. The proposals “got poor feedback on first viewing on Monday”.  After the two companies confirmed details of the deal, more than £100m was wiped from the combined value of their shares. One of the key problems is that the new company will largely be run by Capco’s management, with most of Shaftsbury’s team (including its CEO) departing, even though Shaftesbury has a “better record of growing its net asset value over the past decade”.

However, the terms of a deal have been clear since June 2020 “when central London was a lockdown-induced ghost town” and Capco paid £486m for a 26% stake in Shaftesbury, says Aimee Donnellan on Breakingviews. That puts it in the driving seat, because it can block any competing bid.

The challenge may come from competition authorities. “At the moment retailers… can play one property owner off the other”, so landlords claim they need to combine forces in response. But “as crowds return to central London, it will be harder to argue that the pandemic has weakened their bargaining power”.

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