(Bloomberg Opinion) -- The divide between investors who believe Covid-impacted businesses should prepare for the worst and those who would prefer firms to muddle through is widening. Heavily shorted Unibail-Rodamco-Westfield is facing resistance to a 3.5 billion-euro ($4.1 billion) cash call from shareholders who think the mall operator can get by. The malcontents’ arguments are strong.
Everyone agrees Unibail has too much debt, a legacy of its takeover of Westfield Corp. in 2018, which brought a brand and malls in London and the U.S. The question is the speed at which to reduce the burden. The company is in a hurry: Directors will always want to avoid accusations they didn’t take steps to protect the balance sheet if things get worse. Last month, Unibail unveiled a share offering alongside disposals and other cash-saving measures collectively worth 9 billion euros. The goal was to preserve a strong investment-grade credit rating, with borrowings worth below 40% of the value of its assets.
Embarrassingly, this is now being called into question by two very credible voices — former Chief Executive Officer Leon Bressler and telecoms billionaire Xavier Niel. They point out that in spite of Covid, Unibail had little difficulty raising funds in the bond markets even before the rights offer was announced. The mall landlord has 3.4 billion euros of cash at hand — and a multiple of that in credit lines. That suggests it has breathing space to cut debt through a more ambitious disposal program, conducted with patience, all without having to hold shareholders to ransom for more money.
The asset sales in mind are far more radical than what Unibail is planning and amount to a full strategic reversal. Bressler and Niel want an exit from the U.S., largely undoing the Westfield deal, arguing it lacked synergies and diluted the overall quality of the business. Unibail’s severe share-price underperformance between the announcement of the acquisition and onset of the pandemic suggests the market had already come to the same view.
These arguments are forceful, but the naysayers’ 4% stake doesn’t give them much sway in a shareholder vote. They will need to buy more shares or rope in support to have a meaningful chance of blocking the fundraising and changing strategy. That said, they aren’t without friends.
Unibail has the fear factor on its side and can play to that part of the market fixated on the downside. The impression here is that management has been driven to the cash call to get the short sellers in the equity market off its back. The bond market, which is likely taking a longer-term view about the quality of Unibail’s underlying assets, is much more sanguine, and the prospect of an equity hike doesn’t fully explain that.
Given Unibail is asking for so much money relative to its 5.5 billion-euro market value, it needs to demonstrate that the pain it proposes inflicting on shareholders is entirely necessary.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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