Financial Mail - - COVER STORY -

doors in 1973 and is still one of the largest and most-vis­ited shop­ping cen­tres in SA. A few years later he added East­gate to Lib­erty Life’s mall port­fo­lio.

His suc­cess on the SA re­tail prop­erty front prompted Gor­don to ex­pand his shop­ping centre in­ter­ests to the UK, where he also held cit­i­zen­ship.

When he listed Lib­erty In­ter­na­tional on the JSE in the late 1990s, it was the first — and for many years only — di­rect route for SA in­vestors to share in the rich pick­ings of off­shore real es­tate mar­kets. The stock was widely held by lo­cal port­fo­lio man­agers and large SA pen­sion funds.

Gor­don’s pi­o­neer­ing move paved the way for other SA en­trepreneur­s to bring more off­shore prop­erty plays to the JSE. They in­cluded Re­silient’s Des de Beer and the late Marc Wainer, who were in­stru­men­tal in list­ing New Europe Prop­erty In­vest­ments (now Nepi Rock­cas­tle) and Re­de­fine In­ter­na­tional (now RDI Reit) in 2009/2010.

Over the years, Gor­don’s bet on UK shop­ping cen­tres paid off hand­somely for share­hold­ers. In May 2010, Lib­erty In­ter­na­tional was de-merged and split into a sep­a­rate re­tail arm, Cap­i­tal Shop­ping Cen­tres (which would later take the name Intu), and London-based Cap­i­tal & Coun­ties, which owns the iconic play, shop and live precinct Covent Gar­den. By then, Lib­erty In­ter­na­tional was one of the UK’S largest mall own­ers. In 2011, the mall owner ac­quired the Traf­ford Centre in Manch­ester, the UK’S third-largest shop­ping and leisure com­plex, from the UK’S Peel Group as part of a share-swap deal be­lieved to be worth more than £1.6bn.

By 2013 the com­pany had en­tered Spain. It ac­quired stakes in three re­tail de­vel­op­ments, in­clud­ing mega­mall Xanadu on the out­skirts of Madrid and a huge de­vel­op­ment site in the south of Spain.

By late 2015, Intu’s port­fo­lio in­cluded more than 20 shop­ping cen­tres, worth £10bn. At the time, it was trad­ing at record highs of R74 a share, mak­ing it the JSE’S most valu­able prop­erty com­pany, with a mar­ket cap touch­ing R100bn.

Five years on, the pic­ture has changed dra­mat­i­cally. By the time Intu was sus­pended last Fri­day, the share price had crum­bled to 29c, and the com­pany’s mar­ket cap had with­ered to R393m.

Intu’s col­lapse marks an un­for­tu­nate end to an im­por­tant part of Gor­don’s legacy. He was chair of Lib­erty In­ter­na­tional un­til 2005, when he retired on his 75th birth­day. At the time, a large chunk of his wealth was tied up in the com­pany through a 21% stake.

Back then, Forbes mag­a­zine placed Gor­don among the world’s 500 wealth­i­est peo­ple, with a net worth of $1.6bn.

In May last year, six months be­fore the bil­lion­aire passed away at 89, the Gor­don fam­ily still ranked 230th on the UK’S Sun­day Times 2019 Rich List. Be­tween 2018 and 2019, how­ever, his prop­erty wealth had shrunk by £100m to about £600m, no doubt due to the fall in Intu’s for­tunes.

Ac­cord­ing to Bloomberg, the Gor­don fam­ily still owns a 6% stake in Intu. Corona­tion Hold­ings, which un­til re­cently was one of Intu’s largest sup­port­ers, sold its en­tire stake (19% in mid-2019) in March. But SA in­vestors as a whole, in­clud­ing large as­set man­agers such as Ninety One and the Public In­vest­ment Corp, are still be­lieved to hold just more than 20% of Intu. That’s down from about 40% in May 2010, when Lib­erty In­ter­na­tional was de-merged.

Per­fect storm

It is dif­fi­cult to com­pre­hend the ex­tent of the value de­struc­tion in such a rel­a­tively short time. But it seems the com­pany was caught in a per­fect storm.

Stan­lib prop­erty an­a­lyst Ahmed Mo­tara says the down­ward spiral of Intu’s share price was trig­gered in mid-2016, when the UK an­nounced its in­ten­tion to exit the EU.

Since then in­vestor sen­ti­ment has been steadily eroded by a com­bi­na­tion of fac­tors. Mo­tara refers to Brexit un­cer­tainty that led to pres­sure on UK prop­erty val­u­a­tions and the shift from tra­di­tional bricks-and-mor­tar re­tail to e-com­merce, which made it dif­fi­cult to grow shop­ping centre rentals.

More im­por­tantly, the com­pany in­creased its debt to un­sus­tain­ably high lev­els.

Un­cer­tainty was also cre­ated by man­age­ment changes. Long-stand­ing CEO David Fis­chel an­nounced his de­par­ture in mid2018 af­ter an abortive take-over at­tempt by UK ri­val Ham­mer­son.

Fis­chel was re­placed in April last year by

for­mer CFO Matthew Roberts, who has since tried to fix the balance sheet and re­sus­ci­tate the com­pany through var­i­ous rights is­sues and debt re­struc­tur­ing deals with the com­pany’s bankers. But most of th­ese ef­forts came to naught and Roberts stepped down shortly af­ter Intu was placed un­der ad­min­is­tra­tion.

In March this year, the com­pany de­clared a loss of £2bn for the year to De­cem­ber, pre­dom­i­nantly due to a prop­erty value deficit of 23% and a 9% fall in like-for-like net rental in­come. That brought Intu’s to­tal prop­erty val­u­a­tion losses to 33% from De­cem­ber 2017 peaks.

Mean­while, debt lev­els had reached £4.5bn, which placed the com­pany’s loan-to­value (LTV) ra­tio at 68%, prompt­ing fears that lenders will start call­ing in loans.

An LTV of 68% is con­sid­ered sky-high, even in UK terms, and com­pares with av­er­age LTVS of 30%-40% for most SA real es­tate in­vest­ment trusts (Reits).

Fol­low­ing the re­lease of dis­mal re­sults, Roberts had to aban­don a £1.3bn emer­gency cap­i­tal raise, as not enough in­vestors were will­ing to sup­port the call.

Shortly af­ter, Intu ap­pointed char­tered ac­coun­tant and turn­around spe­cial­ist David Har­grave to help re­struc­ture the busi­ness and sell some of its malls to pay off its debt.

Though the com­pany has man­aged to sell its stakes in two of its three Span­ish malls, it is a case of “too lit­tle, too late”.

And then Covid-19 hit. Mo­tara says the UK’S sub­se­quent 12-week lock­down of nonessen­tial re­tail­ers was prob­a­bly the tipping point that pushed the com­pany into ad­min­is­tra­tion. The lock­down led to min­i­mal rental be­ing col­lected from shop­ping centre ten­ants, he says, which fur­ther af­fected Intu’s abil­ity to ser­vice its debt obli­ga­tions.

While Intu may ap­pear to be a vic­tim of Brexit, the rise in e-com­merce and Covid-19, an­a­lysts be­lieve man­age­ment should shoul­der a large part of the blame. Many of Intu’s prob­lems, they say, seem to have been of its own mak­ing.

“Sadly, Intu is a tale of man­age­ment hubris, in­cred­i­bly bad cor­po­rate struc­tur­ing and a dash of bad luck,” says Gar­reth Elston, chief in­vest­ment of­fi­cer of Reit­way Global, a Cape Town-based as­set man­ager that in­vests in off­shore Reits.

Blam­ing Brexit and e-com­merce for Intu’s col­lapse is a cop-out, he says. “Intu’s UK peers have also been ex­posed to pres­sure from on­line re­tail and the post-brexit ref­er­en­dum malaise. Yet they have proven far more re­silient.”

Be­sides, Intu’s prob­lems are not new. “We have viewed Intu as a fun­da­men­tally dam­aged com­pany for sev­eral years,” Elston notes. He cites man­age­ment’s ex­ces­sive use of debt as key to the com­pany’s down­fall, along with the “house of cards” that was its cap­i­tal struc­ture. A lack of in­vest­ment to main­tain and im­prove the com­pany’s shop­ping cen­tres and the in­abil­ity to com­plete var­i­ous po­ten­tial takeovers and merg­ers added to its woes, he says.

Elston refers to a pro­posed merger with US shop­ping centre gi­ant Si­mon Prop­erty Group in late 2010, and with Uk-listed Ham­mer­son, which owns a port­fo­lio of more than 50 shop­ping cen­tres, re­tail parks and out­let vil­lages across the UK and Europe.

In 2017, Ham­mer­son an­nounced plans to merge with Intu, but the deal never ma­te­ri­alised.

A po­ten­tial buy­out in 2018 by the Peel Group, which owns a 27% stake in Intu, also fiz­zled out.

Elston ar­gues that Intu’s man­age­ment was never prop­erly aligned with share­hold­ers. “Even though the com­pany’s strat­egy failed, ex­ec­u­tives faced lit­tle per­sonal risk and were hand­somely re­warded. In stark con­trast, in­vestors are prob­a­bly go­ing to be left with an empty bag,” he says.

Evan Robins, port­fo­lio man­ager at Old Mu­tual In­vest­ment Group, shares the sen­ti­ment. He refers to Intu’s ul­ti­mate im­plo­sion as a “slow-mo­tion train wreck”.

Like Elston, Robins be­lieves the com­pany’s prob­lems aren’t linked only to Brexit and a weak and chang­ing UK re­tail land­scape. “Man­age­ment fail­ure is also to blame,” he says.

By way of ex­am­ple, Robins points to man­age­ment’s stub­born re­fusal to take note of mar­ket sig­nals. “They never be­lieved things could get as bad as the mar­ket was pric­ing in,” he ex­plains. “Man­age­ment also didn’t re­duce gear­ing when they had the chance years ago through rights of­fers, dis

Intu Lake­side: Thur­rock, Es­sex, near London

pos­ing of prop­er­ties or cut­ting div­i­dends.”

He says that if man­age­ment had taken some pain ear­lier, the dire sit­u­a­tion that Intu now finds it­self in could have been averted.

In ad­di­tion to this in­ac­tion, Robins says Intu man­age­ment served share­hold­ers badly over the years by turn­ing down at­trac­tive takeover and merger of­fers.

An­a­lysts be­lieve the Intu saga should be seen as a cau­tion­ary tale for SA prop­erty com­pa­nies, es­pe­cially those with high gear­ing lev­els.

Mo­tara says lessons to be learnt from Intu in­clude the im­por­tance of man­ag­ing debt lev­els, keep­ing a sim­ple cap­i­tal struc­ture and sell­ing un­der­per­form­ing as­sets.

Trans­parency is also cru­cial. He be­lieves that if man­age­ment doesn’t en­gage proac­tively with stake­hold­ers, com­pa­nies can for­get about share­hold­ers sup­port­ing rights is­sues and re­cap­i­tal­i­sa­tion ef­forts dur­ing tough times.

Robins agrees that the main take­away for SA Reits is to avoid tak­ing on more debt — par­tic­u­larly when the mar­ket out­look is de­te­ri­o­rat­ing. He reck­ons it was the high level of gear­ing that ul­ti­mately killed Intu.

Try­ing to max­imise div­i­dend pay­outs can also sink a com­pany, he adds.

At this stage, it’s un­sure what the fi­nal out­come of Intu’s ad­min­is­tra­tion will be, and how long the process will take un­der au­dit­ing firm KPMG’S London-based re­struc­tur­ing prac­tice.

KPMG part­ner David Pike hasn’t pro­vided








Intu Metro­cen­tre: Gateshead, Ty­ne­side, UK

the FM with any clear an­swers on a time­line, ex­cept to say the ad­min­is­tra­tors are in the process of as­sess­ing var­i­ous op­tions.

He says all of Intu’s 17 UK shop­ping cen­tres, which at­tract about 400-mil­lion vis­i­tors a year, as well as its Madrid mall, are con­tin­u­ing to trade as nor­mal since the UK eased trad­ing re­stric­tions from June 8.

“With all cen­tres re­main­ing open, we look for­ward to work­ing with staff, sup­pli­ers and other key stake­hold­ers to pre­serve value and jobs in th­ese im­por­tant re­tail des­ti­na­tions,” he says.

The fact that none of Intu’s malls have closed their doors and the com­pany’s port­fo­lio still main­tains a healthy va­cancy rate of less than 5% will no doubt pro­vide a glim­mer of hope that the com­pany may be sal­vaged. But an­a­lysts say it de­pends on what course of ac­tion Intu’s ad­min­is­tra­tors take to re­struc­ture it and to re­pay cred­i­tors.

The com­pany can either be re­ha­bil­i­tated as a go­ing con­cern, bro­ken up and sold, or liq­ui­dated. An­a­lysts say if it’s re­ha­bil­i­tated and its JSE and LSE sus­pen­sions are lifted, in­vestors may still be able to sell their shares. How­ever, share­hold­ers should prob­a­bly not hold their breath; such an out­come is likely to be a long shot.

As Reit­way Global’s Elston notes: “Given the amount of debt out­stand­ing and the crash in UK re­tail prop­erty val­ues amid an on­go­ing pan­demic-in­duced eco­nomic disas­ter, share­hold­ers will be lucky to get any­thing back on their in­vest­ment.”

Ham­mer­son is ap­proached by French prop­erty gi­ant Klépierre with a £4.9bn takeover and scraps the Intu takeover pro­posal. Mean­while, a con­sor­tium in­clud­ing the Peel Group launches a £2.8bn takeover bid for Intu but later with­draws the of­fer. Intu CEO David Fis­chel an­nounces he will step down af­ter be­ing at the helm since 2001.

In April, Intu ap­points Matthew Roberts CEO and re­places act­ing CFO Bar­bara Gibbes with Robert Allen. Later that year, Intu en­ters talks to sell its Span­ish in­ter­ests. In De­cem­ber it sells its share in the Zaragoza as­set for €237.7m.

Intu sells its Oviedo as­set for about €85m and con­firms plans to ask in­vestors for £1bn to raise new eq­uity to fix its balance sheet.

Intu says it is in talks with Hong Kong-based re­tail prop­erty in­vestor Link Real Es­tate In­vest­ment Trust in a bid to pay down its £5bn debt pile, but Link pulls out.

Af­ter re­port­ing a loss of £2bn for 2019, Intu an­nounces a £1.3bn emer­gency cap­i­tal raise, but scraps it as not enough in­vestors sup­port the call. The com­pany warns it will col­lapse un­der debt of £4.5bn if it is un­able to raise fur­ther funds. As the coro­n­avirus cri­sis es­ca­lates and lock­down comes into place, re­tail­ers de­lay rent pay­ments.

Intu seeks stand­still-based agree­ments with cred­i­tors as it strug­gles with the Covid-19 dis­rup­tion and warns it will breach debt covenants with lenders at the end of June.

By June 26, af­ter failed crunch talks with its lenders, Intu is pushed into ad­min­is­tra­tion and its shares on the LSE and JSE are sus­pended.








Don­ald Gor­don: One of the first South Africans to ex­pand his prop­erty empire off­shore

Matthew Roberts: Has tried to re­sus­ci­tate the com­pany

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