Partnership Proposal

Is It Deal Time in Europe?

Liberty International PLC, a London-based property company, appears to be the target of a looming takeover bid, fueling speculation that a deal could spark a wave of acquisitions of undervalued European real-estate firms.

The ball began moving Friday when Simon Property Group Inc., the largest mall operator in the U.S., announced that it had taken a 3.45% stake in Liberty, a real-estate investment trust that owns shopping centers and residential buildings. The announcement drove Liberty's shares higher and lifted stocks in the entire sector.

Westfield Group, the world's biggest shopping-mall owner, based in Australia, then followed with a filing on Tuesday that it had paid $41.9 million for a 2.96% stake in Liberty. Simon responded quickly, raising its stake to 4.22%. Analysts predicted a bidding war could break out.

"This increases the takeover chance for Liberty," wrote Harm Meijer, a property analyst at J.P. Morgan, in a note to clients. "Although the parties could still join forces, it leaves open the option of a standoff between Liberty, Simon and Westfield."

The core of Liberty's business, and clearly the most attractive part to potential acquirers, is Capital Shopping Centers, which has 14 shopping centers in key locations valued at some £6 billion ($11.1 billion). The acquisition would transform either Simon or Westfield overnight into a major player in U.K. retail real estate.

Liberty's stock was trading at 875 pence Thursday before the disclosure of Simon's stake. In trading Tuesday, Liberty was a leading gainer on the London Stock Exchange, closing at 995.5 pence, up 5.3%.

With none of the companies commenting on the developments, analysts were left to speculate about the motives driving the moves and whether Simon and Westfield were acting in concert or trying to outmaneuver each other. Westfield and Simon have joined together in takeover bids for mall owners before. They failed in 2002 with a hostile bid for rival Taubman Centers Inc. of Michigan. They combined successfully to buy Netherlands-based Rodamco North America NV shopping centers in 2002.

"Both groups have now clearly pulled up a seat at the table," said Merrill Lynch property analysts in a note to clients. "They could be either working together and looking to divide up the assets, or the move by Westfield could be a defensive move to try and keep new entrants out of this market."

Westfield is currently building the U.K.'s two largest malls. Its Westfield London project is scheduled to open in October and Westfield Stratford City on the grounds of London's 2012 Olympic Games complex is targeted for a 2011 opening. Simon, based in Indianapolis, operates 323 U.S. properties and 51 in France, Italy and Poland but none in the U.K.

Whatever the outcome, the move on Liberty could mark a turning point and herald a wave of deals. Overall, U.K. REITs are trading at significant discounts to the value of the property portfolios, or net asset value.

Property values have been falling in the wake of the subprime-mortgage crisis, and stock prices of property companies have followed. Some investors believe property stocks now undervalue the companies' assets, which would amount to a buying opportunity.

According to J.P. Morgan estimates based on Monday's closing stock prices, for example, British Land Co. was trading at a 29.8% discount to its net asset value, Brixton PLC was trading at a 39% discount, and Hammerson PLC was trading at a discount of 25.9%.

And the discounts aren't affecting only U.K.-listed property companies. Alstria Office REIT AG, a German REIT, was trading at a discount of 27.2%. Paris-based Unibail-Rodamco, Europe's biggest property company, was trading at a 20% discount.

Clearly, investors could be asking themselves whether there could be more potential in buying the companies outright than buying individual assets. "This could mark a turning point," said John Lutzius, head of the European operations of U.S. research boutique Green Street Advisors.

Still, some investors aren't sure the math works, if your only motive is to try to cash in on the gap between where assets are valued today and where they could be a year from now. If there is an acceleration of mergers and acquisitions in the sector -- and that is still a big if given the tight credit situation -- it will likely be driven by strategy and not short-term profit.

"Takeovers in this sector are driven by investors who believe that the net asset value is understated, not the share price," said Olivier Elamine, chief executive of Germany's Alstria Office REIT. "And in the end, I don't think you will get the discount. The final price will be at net asset value."

Indeed, long-term strategy is what is likely to be driving Simon and Westfield. Investors point out that Liberty owns a portfolio that would be hard, if not impossible, to replicate through piecemeal asset purchases. Its portfolio is worth some £8 billion and includes choice properties like London's Covent Garden Estate, a main tourist attraction.

That is why it seems the advances by Simon and Westfield are more about long-term positioning in the U.K. market. And in the end, analysts expect both companies to be willing to pay a premium for Liberty.

"Anybody looking at the chessboard in his desire to be a major player in the U.K. shopping-center business needs to decide now how to respond to this news," said Mr. Lutzius of Green Street.

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