the centro shareholder power game

Below is a Review of some detailed points over the last 7 and 1/2 months that might be worth another read....This is more targeted to Investors and Journalists/Writers who don't fully understand the centro story and continue to guess.

Commentary by Business Spectator's > Stephen Bartholomeusz and Robert Gottliebsen (reputable sources)... Please note that full articles can be obtained via their site.



Some daily press journalists covering the Centro affair are having great difficulty understanding the key issues facing the Centro Group and its CEO Glenn Rufrano. The articles are often inspired by those who are looking to buy key Centro shopping centres cheaply or who want to manage a slice of the group.

If you were looking at an equity-style asset class that would be a good cash generating performer during tough global times, high on the list would be small food-based shopping centres. Shopping centres that have a high proportion of discretionary spend, like those owned by Westfield in the US, carry higher risk.

Centro has the world's largest collection of these smaller-style centres and also has the management expertise to run them. As a result, Centro has received considerable interest in its centres, especially those in Australia. The credit crunch in the US makes 2008 a bad year to be selling any American property.

It is a balance sheet issue, not an operational issue.

Gr>"The central issue we are facing is one of capitalisation. Our review is focused on recapitalising the Centro balance sheet", he said.

Earlier, sources close to Centro, which needs to either find new equity through an investor or an outright sale.The company is optimistic that a deal will be reached.

If the banks appoint an administrator to Centro Properties, then the whole structure collapses and the Centro Properties management rights will have little value.

The Centro shareholder power game works like this. In the base company, Centro Properties, the banks are owed some $4 billion, unsecured. Given the complexity of the group, one of the most valuable assets of Centro Properties is the right to manage the shopping centres of the entire Centro group. The contract yields more than $200 million each year – and rising.

If the banks exercise their security and appoint an administrator to Centro Properties, it will automatically trigger the disintegration of this fantastic asset. The banks are therefore stymied – they can't exercise their security without destroying their key asset. That gives shareholders and directors much more power than is normal in such situations because they must approve any reconstruction proposal.

The real equity value of the shopping centre network has not been reduced anywhere near as much as Centro's market capitalisation, which fell from a peak of $8 billion to the current $300 million).

The US banks are owed around $2.4 billion in unsecured loans to the so called Super LLC and Shopping Centre America joint ventures. The US banks do not have the same management contract constraints as the Australian banks and official management of the American joint ventures would not trigger a break up of the whole management group. But the US banks have worked out that they would suffer heavy losses if they were forced to manage and sell a large group of shopping centres.

The other difference between Centro and "normal" crashes is that the assets all produce income and that income is being used to pay bank interest and distributions to syndicates as well as to complete capital development projects to enhance asset value. And food retailers are about the most defensive asset you can find.

What the banks may have to do is recapitalise the business themselves and become partners with the shareholders.

The banks can still remember that they took haircuts in the crashes in the 1990s that were totally unnecessary because the underlying assets were good.

Rufrano’s negotiating position is strengthened further if the only offers on the table involve the banks themselves losing money. They will be even more inclined to stick with the existing management, particularly as at an operational level Centro appears to be performing really well.

As Gottliebsen suggested, it might also be possible for the banks to either help stabilise and recapitalise Centro themselves, through a partial debt-for-equity swap or by trading a longer extension for some exposure to Centro’s upside.

The banks know that they can’t put Centro into either a formal or informal administration and force it to start liquidating its assets. A formal administration would destroy the value of their loans by wiping out the value of Centro’s service businesses and Centro shareholders would never agree to a forced sales program that left them nothing of any substance.

Why Centro shareholders have so much power over the banks………

In essence the banks have loaned more than $3 billion to Centro Properties unsecured. And to be repaid, the Centro Properties shopping centre management contracts must retain substantial value. But if the banks pull the plug on Centro Properties or Centro Retail, then the management contracts will be worth very little because official administration triggers cessation clauses.


The banks therefore cannot impose a reconstruction on either Centro Retail or Centro Properties that does not deliver good rewards to shareholders, because if the shareholders reject the arrangement then the banks will have no choice but to accept the rejection, given that appointing an administrator is not an option.

Effectively Centro shareholders and the banks have to find a way through the problem. My solution is(Robert Gottliebsen) to enlist the good will of the syndicate holders and convince them to buy some of the Australian centres helped by attractive loans. The exercise is not as simple as it sounds, because of the various cross shareholdings but it is possible Some daily press journalists covering the Centro affair are having great difficulty understanding the key issues facing the Centro Group and its CEO Glenn Rufrano. The articles are often inspired by those who are looking to buy key Centro shopping centres cheaply or who want to manage a slice of the group. . And if syndicate holders can't raise the money then the banks will have to find some other equity source that maintains as many shopping centres as possible within the Centro management web.

The key objective of the next few months is to sell shopping centres to people who want to keep Centro on as manager.

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.

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.