centros moment of truth approaches

Hopefully we will learn tomorrow just what is going to happen in the multi-billion dollar property disaster that Centro Properties Group Ltd, Australia's second largest shopping centre owner, has become. But, judging from the weekend press, it's clear the company, with its complex holdings of shopping centres in Australia and the US, is not viable in its current form. Management and the board will have to change, as will the ambition of the company to remain a listed entity. Being in effect a fire sale, asset values in the accounts of the company and the retail trust will not be met, and opportunistic buyers will take advantage of Centro's woes to drive prices lower and score bargains. Shareholders may get something: it's too early to say. The best bet would be to get rid of the problematic US assets and try and shrink the business to its profitable Australian hub. Many of the US shopping malls acquired early last year are poorly located, have poor tenant lists and do not come anywhere near matching the quality of Westfield's US mall holdings. That means realisation values will be below book. Break-up remains the only option, barring the last minute appearance of a 'white knight' willing to rollover and refund billions of dollars in loans. That is uncertain given the reported complexity of the company's accounts. But an aggressive hedge fund/private equity group with access to lots of money could do it. The one thing the company and its advisers will have to avoid is "cherry picking'' attempts by rival managers to grab good assets or income streams. That will reduce the value of the company if allowed to happen. One such ploy was from fund manager MFS Ltd which on Friday offered to take over as administrator of about 35 unlisted property funds. According to a statement made from MFS, which manages around $5 billion in assets mainly in property and tourism, it is interested in becoming supervisor only, and is not interested in any actual real estate acquisitions from Centro. MFS shares fell 9.9% Friday to $3.55 as investors grew uneasy about its vigorous expansion in the past year or so and its intervention in the Centro situation. The MFS announcement came as Centro's shares, and those of its managed property trust Centro Retail Group Ltd, were put in a trading halt. The securities will remain subject to the halt until either normal trading begins on January 15 or an announcement is made. Centro lost more than 80% of its market value in December (76% in one day alone) when the group revealed it was having difficulty refinancing about $1.3 billion of maturing debt. Thursday saw Centro Properties securities close down 22.52%, or 25 cents, at 86 cents, having touched an intra-day low of 85 cents. Centro Retail fell 24% to 58.5 cents. Thursday's decline came amid reports that Centro and its lawyers had met with the Australian Securities and Investment Commission (ASIC) in Sydney on Wednesday. Centro said last week it had received unsolicited approaches form parties wishing to invest in the group or buy up some of its assets, which at the end at the end of fiscal 2007 included 810 properties, two-thirds of which are in the United States. Centro is looking for potential buyers for the company or its assets to help refinance $3.9 billion by February 15. That is going to be a tall order, even after the drop in rates in wholesale market interest rates after central banks pumped hundreds of billions of dollars into markets at the end of last month. There are bigger and more deserving companies to be financed than Centro: although money has its price if it is around. Centro had about $26.6 billion of funds under management last June. In 2006-07, Centro Properties reported a net profit of $469.72 million, compared to $664.19 million in the previous corresponding year. A profit this financial year is no longer on the cards and the losses could be in the billions of dollars. From weekend media reports Centro is a mix of highly complex corporate finance and ownership structures which has upset some big lenders. Centro shares peaked at $10.02 on May 7, less than a month after the company completed the acquisition of New Plan Excel Realty Trust, paying $5.2 billion in cash and assumed debt to become the fifth-largest US mall owner. That is the deal that broke the company's back. To get the deal done it financed much of it through short term loans that needed to be rolled over late last year. According to the Sydney Morning Herald, the irony is Centro had the chance of rolling over the money earlier in the year but wouldn't proceed because the higher finance costs would have cut earnings and asset values. That was a very poor decision and will alone cost CEO Andrew Scott and the board their jobs. Its two most valuable assets are the Centro Galleria in Perth and Centro Bankstown in Sydney. The two centres were worth a combined $1.17 billion or about 4.4% of Centro's total mall assets, the company said in its annual report. Those assets are probably not too far out given the strength of Australian retailing at the moment and their location. Many of its other Australian shopping centres are regional or second tier urban malls, which wouldn't be as attractive as those of rival Westfield. The National Australia Bank, Commonwealth Bank of Australia and ANZ Banking Group Ltd have hired insolvency firm McGrath Nichol to investigate Centro amid concerns about the combined $3.5 billion the company owes them. An estimated $1.6 billion of that is said to be unsecured, and it is the complexity of Centro and its myriad funds and cross guarantees that has set off worries about a 'dirty' break up with legal action between lenders to protect their positions. Legal action will delay sales and lower recoveries for everyone involved.