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Despite the subprime crisis, the merger of commercial property developers Unibail and Rodamco went off without a hitch.
Tim Burke, CFO Europe Magazine
December 10, 2007
Sometimes it's better to be boring. In a year when many big M&A deals were drawn out, contested affairs, French commercial property group Unibail's merger with Dutch peer Rodamco Europe bucked the trend, closing in just three months with no major hitches. That's not to suggest it was simple — such deals rarely are, says Peter van Rossum, Dutch CFO of the merged Unibail-Rodamco. But the companies' boards certainly made the transaction look easy, and part of the kudos for that must go to 51-year-old van Rossum.
A finance veteran of Shell, van Rossum spent 24 years in various roles at the energy group before joining Rodamco as CFO in April 2006. Exactly one year later, the group announced the merger to create Europe's largest property company with a portfolio worth €23.9 billion. At the time of the announcement, the €11.2 billion deal — its value based on Unibail's April 5th share price — was the biggest acquisition of a Dutch company ever, now surpassed by the ABN Amro takeover.
In the middle of a Europe-wide trip to review the enlarged company's portfolio, van Rossum told CFO Europe about deciding fair value in a merger and why the impact of the subprime crisis on the commercial-property sector does little to concern his colleagues.
You were on Rodamco's board before the merger with Unibail — when did discussions start and what was the rationale for the deal?
The companies had looked at each other before but we were approached by Unibail to start talks at the beginning of the year. The combination of the two companies is logical — they have very much the same vision, and that's to own and operate large shopping centres, Unibail traditionally in France and Rodamco throughout Europe.
What made it the right time to combine the two?
The timing of the transaction was to some extent driven by changes in the legislation around the Dutch REIT regime [known as Fiscale Beleggingsinstelling or FBI]. There were two important impediments that were removed in the middle of this year. Dutch legislation had prevented foreign entities from owning more than 25% of a Dutch FBI — that restriction was lifted. The second impediment was that it was impossible to undertake project development. Unibail started out as a developer and did a lot of its development in-house. Rodamco traditionally didn't touch this because it wasn't legally allowed to. That restriction was lifted as well.
The deal seemed to run smoothly considering it was one of the larger deals in quite a troubled year for some areas of M&A. Why was that?
These deals are never easy. We talk about it as a merger, but it was a share-for-share exchange where Rodamco shareholders were asked to exchange their shares for Unibail shares. Technically, that's more like a takeover.
You need to decide on a proper exchange ratio between the shares, and that's a price negotiation. It was my task, alongside the chief executive of Rodamco, to negotiate a good deal for our shareholders and to get to that price level. We came to a 15% premium over the last share price. [The offer was 0.53 Unibail shares for every Rodamco share.]
How did you go about achieving that?
By mutual due diligence. It's a process that starts by looking at what kind of assets they have, what's the track record in managing those assets and what's the outlook for the coming years — what kind of cash flow can they generate, what value potential do they have? How robust are the projects they have in the pipeline? What are they going to contribute to shareholders in the coming years? What kind of systems do they have in support of recording and reporting?
The beauty here is that our businesses were very comparable. We're active in the same market segments and know each other's assets pretty well. In France we shared ownership of four assets, and so in looking at the key parameters in a deal — earnings per share and net asset value — we quickly reached the comfort level we needed.
How has the integration progressed?
It's going well. We announced in early September the top 50 positions in the group. A month later we announced the entire organisation. So everybody — and we have about 1,500 staff — knows his or her place in the organisation. We've agreed on the key processes that we need to run the company, including how we decide on things, how to communicate with the supervisory board and how to run the business plan.
Given the current situation in the property sector, do you expect the five-year plan you're working on to include significant upheavals such as disposals?
We get a lot of questions on divestments and, if we have something to say, we will give some indication when we publish our annual accounts in February 2008.
Even before the events of the last couple of months — the subprime crisis and real estate being a bit in the doldrums — we [had] a focus on cash flow. The absolute value of real estate is less important to us than the cash flow it can generate. Particularly on the shopping-centre side, our assets are there to stay because there's always a way we can make more money out of them: reinvent them, extend them, change the tenant mix or attract more visitors and improve the cash flow on a continued basis.
The yield game you see others playing, gearing companies to 90% and hoping that the value of real estate will increase so they can make a few bucks out of it, is not the game we're in. If you look at our long-term value, the two companies were both very conservatively geared. We have 26% loan-to-value, which is very low. I'd say it's a pretty luxurious position to be in, particularly when the cost of borrowing is going up. We don't have any problems at the moment in borrowing. We have big lines of credit still open, so that's not keeping us awake at night.