centro comentary

If Mike Fitzpatrick puts his talents and money behind the Centro shopping centre management operation then the outlook for the group will change dramatically.

But, of course, Mike won’t be offering anything like the $5 billion-plus that KPMG valued the Centro management operation at prior to the Centro demise, so there is no certainty that a deal can be struck.

In particular there needs to be firm management agreements with the Centro centres so that the management contract has value. But if those centres are contracted, then on the basis of the half yearly accounts, we are looking at a Centro shopping centre management business that is capable of generating more than $100 million a year from property management fees, $50 million from development and leasing and $280 million from funds management. If you deduct overheads of, say, $180 million we are looking at a business capable of generating a before tax profit of around $250 million, in times when syndicates are able to offer product.

The Centro banks need to gain value for this extremely valuable shopping centre management operation because it’s the only way they can recoup their unsecured loans to Centro Properties.

A Centro management operation controlled by Fitzpatrick and the man who built Centro’s MCS syndicate business, Julius Colman, would greatly increase interest among syndicate members in buying Centro shopping centres, particularly those in Australia. And with the banks anxious to swap Centro Properties unsecured exposure for secured exposure, bank money to fund the syndicate purchases should be available as long as a big slab of the sale proceeds falls to Centro Properties. It would be effectively swapping Centro bank unsecured debt for secured debt and enhancing the value of the Centro shopping centre management operation. Fitzpatrick and Colman can therefore add Centro value in a unique way, though there is no certainty of a deal.

Mike Fitzpatrick is well known for building up the Hastings infrastructure business which he sold to Westpac – the last tranche, fairly close to the top of the market. He also backed Colman in the MSC syndicate business which was sold to Centro in 2003. Fitzpatrick is currently on the board of Rio Tinto working to ensure that BHP pays the full price.

But what fascinates me about Fitzpatrick is his role as chairman of the AFL.

Unlike his predecessor the late Ron Evans, Fitzpatrick is rarely seen in the limelight. But he is one of Australia’s best strategic thinkers and you can see his hand in the bold plan to expand the AFL by two teams and take on rugby on the Gold Coast and in western Sydney.

The AFL was converted from a Melbourne suburban competition to a national competition via the strategic thinking of Graeme Samuel (now ACCC chief) and Peter Scanlon (who also was the strategist behind the waterfront revolution). Now Fitzpatrick is taking the AFL to the next level.

The regularity of the cash generation of the Centro centres gives them similarity with infrastructure assets, an area where Fitzpatrick was a pioneer.

A problem for Fitzpatrick and the banks is that any deal that is struck will need shareholder approval and the shareholders will want to see some rewards. If they don’t like the deal then they can invite the banks to appoint an administrator which would see the Centro shopping centre management asset destroyed and the banks lose billions. Rarely have shareholders had such power.