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Outlet stores are great places to pick up bargains. L Catterton, the private equity fund backed by LVMH owner Bernard Arnault, has found just that in a deal with UK landlord Hammerson. It is paying £1.5bn for the retail specialist’s 40 per cent stake in Value Retail, a premium outlet business and owner of locations such as Bicester Village near Oxford. Even at a sizeable discount to book value, the deal marks a turning point for one of the market’s most beaten-down property groups.
A change in fortunes for Hammerson would chime with the broader retail sector. After years of value destruction thanks to ecommerce, there are signs of improvement. Demand for good space is growing and pushing rents higher. Deals are back with both Landsec and British Land striking transactions in recent months. Hammerson, which many had assumed was toast during the pandemic, will soon be armed with £600mn of sale proceeds and a chance to revitalise itself.
Kept going in 2020 by a £550mn rights issue, the group has been trying to shed the Value Retail stake ever since. The 24 per cent discount to book value that L Catterton is paying should not be judged too harshly in that context. Given its private concentrated ownership structure, some discount is appropriate.
The price equates to a rental yield of about 7 per cent, thinks Green Street, which is under the 8 per cent where good quality shopping centres have changed hands. Outlet centres should trade at lower yields (or higher valuations) given the higher density and preponderance of luxury tenants. And Value Retail is one of Europe’s best.
The deal ends Hammerson’s three-year streak of flogging assets to pay down debts, overseen by chief executive Rita-Rose Gagné. Its loan-to-value will fall to 25 per cent, compared with 50 per cent at its worst, leaving Hammerson if anything underlevered.
Deal proceeds will fund increased payouts, including £140mn of buybacks. The rest will go towards improvements in the group’s core shopping centre estate. There are plans to consolidate some joint ventures and develop obsolete space with residential conversions a possibility. Investors will want to see Hammerson’s team maintain their capital discipline now they have money to spend, said Rob Virdee at Green Street.
Hammerson’s shares, still down 80 per cent since the end of 2019, are trading at an 8 per discount to estimated spot net asset value, suggesting some strategic doubts about what comes next. But, remarkably, Hammerson will now be fit to play a part in this tentative retail rally.