El Corte Inglés & Merlin Negotiate an Alliance to Create a Real Estate Giant

11 October 2018 – El Confidencial

El Corte Inglés wants to fulfil the commitments it has made to the financial ratings agencies as soon as possible. At its recent, first-ever bond issue, it promised that it will reduce its €4 billion debt by half over the next 18 months. To this end, Jesús Nuño de la Rosa, President of the distribution group, has decided to expedite the sale of some of its real estate assets, the jewel in the crown of the holding company. According to financial sources, the company is negotiating an operation with Merlin Properties, the largest listed company in the real estate sector in Spain.

The same sources have confirmed the conversations between Jesús Nuño de la Rosa and Ismael Clemente, the CEO of Merlin Properties, the real estate Socimi in which Banco Santander holds a stake and which has assets under management worth €7.7 billion as at 30 June 2018. The negotiations are very open and cover all of the property types that comprise El Corte Ingles’s portfolio, appraised by Tinsa at €17.1 billion for the most recent annual report. Sources close to Merlin declined to comment on this information, whilst official sources at El Corte Inglés indicated that “the firm has not reached a global agreement with any operator”.

According to other sources, the most recent meetings have focused primarily on the purchase and management of the logistics assets owned by the department store company, which were already offered to several agents in the sector almost two years upon the advice of Morgan Stanley. Those conversations did not prosper due to the diversity of the portfolio, which comprises shopping centres, shops and logistics docks, some of which were worth very little at the time and so distorted the value of the portfolio.

But now, having made a commitment to Standard & Poor’s, Moodys and Fitch to reduce the group’s debt, De la Rosa has set himself the priority of divesting all of the assets needed to reduce the liability by around €2 billion. Through that, it will manage to reduce the ratio of debt to operating profit or EBITDA to 2x, compared to the current figure of 4x, which would give it an investment grade rating.

That would represent a very considerable change, which would allow the entity to obtain financing in the markets at cheaper interest rates – now it has paid 3% – given that its bonds could be purchased by all types of investors and not only by those looking to speculate such as now, given that fund managers that only acquire fixed income or equities with a minimum solvency and without risk of default are prohibited from subscribing to below investment grade securities.

Merlin Properties is the entity that is holding the most advanced negotiations with El Corte Inglés, which wants to close an agreement before the end of 2018 or, before 28 February 2019, at the latest, the date that marks the end of its financial year. The current proposal involves the acquisition of some of El Corte Inglés’s real estate assets and the signing of a contract as the manager of the portfolio. The distribution group’s portfolio comprises 94 properties, most of which are in Spain, of which 87% are shopping centres.

Of the total portfolio whose valuation amounts to €17.1 billion, almost €15 billion correspond to points of sale. But the physiognomy of those centres is very heterogeneous, as shown by the fact that whilst four of them are worth €2 billion, most of the assets could be sold for between €100 million and €200 million. But almost one third of the total are what El Corte Inglés itself calls unproductive. In other words, sites where they lose money. The group has tried to convert them into outlets for large brands, but the truth is very few of them have the characteristics to be able to be transformed into places of the calibre of Las Rozas Village and Factory.

In terms of the points of sale considered unproductive, the following stand out: Leganés (Arroyosur), Jaén, Oviedo, Elche, Guadalajara, Talavera, Albacete and Eibar. In addition to these shopping centres (which make losses), the company has another seven sites breaking even, such as those in Cádiz, Castellón, Córdoba and Arroyomolinos. The value of these shopping malls, as they are known in the sector, is more doubtful, given that a sale and leaseback contract could not be signed since the revenues do not cover the debt. Moreover, given their physical structures, most of them do not have windows, their transformation into offices, the main market of Merlin Properties, or hospitals would be more difficult.

Of the €7.7 billion in assets that Merlin manages, €5.5 billion correspond to offices, €934 million to shopping centres and €403 million to commercial premises on high streets.

Original story: El Confidencial (by Agustín Marco)

Translation: Carmel Drake

144