Leon BRESSLER and Xavier NIEL (Iliad’s CEO), with a 4.1% stake (value of €200m at the current share price, the breakdown being unavailable) want to avoid the €3.5bn recap and for Unibail to focus on its core business: Europe. This would mean a quick exit from the US, i.e. selling Westfield’s assets. Unibail bought Westfield in late 2017. Mr BRESSLER (73 years old) left Unibail in 2006 (CEO 1992-06).

They are asking for three seats. Beyond Messrs NIEL and BRESSLER, Mrs GALLARDO is being proposed to integrate the board (Conseil de Surveillance). Mrs GALLARDO’s family controls ALMIRALL (not covered, €1.7bn market cap). The board had 10 members at 31 December 2019.

Surprising behaviour

Subscribing to the recap would only cost these two dissidents €140m (4% of the €3.5bn recap, ex-rights). If they consider the recap as over-dilutive, or useless, they could silently consider the opportunity of strongly oversubscribing and increasing their 4% stake.

Their fight isn’t 100% rational, in our view. With the EGM taking place on 10 November, it’s too late to organise the resistance and avoid the recap in our view: they should have started it earlier. The recap is probably a pretext to prepare for the next step implying: i/ changing the commandant in chief, and ii/ strong asset stripping in order to reduce the discount vs. forward 2021 NAV.

We believe that both investors are playing at making a coup, as activists would do. Their current 4% stake is insufficient to make their demand for three seats credible (i.e. 30% of the board, should its 10 members number be considered as stable). As a 15% stake would be sufficient to influence Unibail’s governance in our view, the deep-pocketed Mr NIEL could have to invest another tranche of €700-900m in 2021 (post-recap) or welcome other shareholders.

Avoid the recap?

Avoiding the capital increase would, if it happens, stretch the balance sheet: Unibail’s liquidity is strong enough and the company can deal with c. 50% leverage (42% in June 2020), at the cost of increasing financial expenses spread out over 2023-30 due to rather high debt maturities. Unibail, having €15bn to repay before 2025, the €3.5bn recap will help, on top of €12.7bn of the undrawn credit lines.

Should the dissidents be revealed as being fully sincere, by considering a recap as useless, they would clearly play the scenario that GAV will not lose more than 20-25% before stabilising, and that Unibail could therefore pass the trough without additional resources (another recap) at a much lower share price (<€20 in 2021-23 once the 2020 recap is excluded?).

Governance

We identify the premise of a putsch. Unibail’s current CEO, Christophe CUVILLIER, may have to leave the boat in 2021-22, as he is responsible for the strategic choices (i.e. going into the US) having made Unibail fragile beyond its stronger European niche. The dissidents’ strategy depends on fully unravelling, or close to, Mr CUVILLIER’s artwork. Mr NIEL needs, however, to combine with other shareholders and increase his low 4% stake in favour of… the recap he fights.

Unibail could transform into a “governance play” in 2021, without an aggressive takeover bid as the company looks too big or risky (c. €9bn market cap, ex-post recap) nor a premium at the end of the day. It could lead, nevertheless, to accelerating the shift in strategy, exiting from the US under the dissidents’ pressure, and diminishing the discount vs. forward NAV at the end of the day.

Such a battle will probably contribute to pushing up Unibail’s share price in the coming days / weeks, without reducing dilution considerably: we don’t bet on the dissidents’ victory (first round) as we consider the recap as a secondary target, or not a target at all, in fact. The recap will take place. The real strategic target is elsewhere and leans on a large asset-stripping.

Reducing the perimeter would be positive news. But, at what price as the end-market is stuck with assets for sale? We could, nevertheless, argue that selling large portions of discounted assets could be the best option as they could lose even more in 2021-23.

Should Unibail’s share price surpass again the €45-50 mark before the recap, we would consider it as a fair absolute exit price (short term). It doesn’t impact our negative stance, as we believe the massive dilution will occur.

We will have to consider in the future, but not today, the potential consequences of a deeper strategic shift. Increasing our target price sometime in 2021 is now an option. The recap will reduce the risk as the LTV should reach the affordable 32% pro forma level. Further strong disposals in the US would de-risk the balance sheet more and reduce the discount to NAV. The latter would, nevertheless, diminish further as assets would be sold at extraordinary discounts. By avoiding a second recap which we fear the most, such a strategic shift could be a key catalyst of a recovery.

Read across

Following Hammerson (APG + Lighthouse taking 40% of the company post a dilutive recap), PE funds and banks sometimes buying distressed shopping malls progressively, Mr NIEL could illustrate that… liquidity is back for shopping malls. Should values bottom soon (2021-22?), buyers may prepare their come-back. Is this a first positive signal of recovering share prices?

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