Copying and distributing are prohibited without permission of the publisher.

Watermark

Nationalising Intu would be bold but not reckless

Intu_Trafford_Centre_PA_575_375
By Owen Sanderson
10 Mar 2020

Every time a UK company gets into trouble, the call goes up for a state rescue — calls which the government, sensibly, usually rejects. With the increasingly troubled Intu, however, it might not be the worst idea.

The dawn of greater public spending could be upon us with many calling for UK chancellor Rishi Sunak to loosen fiscal policy in his maiden Budget speech on Wednesday.

Meanwhile, Dominic Cummings , the prime minister's chief advisor, is demanding brave, iconoclastic policy ideas. Perhaps a government stake in the retail industry is just the sort of thing that country needs as it faces the various perils of Brexit and the effects of the coronavirus.

UK retail landlord Intu, owned partly by billionaire John Whittaker, is in big trouble. The company needed a rights issue, and signalled this to the market in spring last year.

Unfortunately, it waited until early this year to actually announce a deal, crashing headlong into the market turmoil created by the spread of coronavirus. Quarantines and self-isolation are sure to hurt retail footfall, but the real problem is a weak company that took too long to start its rescue plan in earnest.

The rights issue was supposed to raise £1bn-£1.5bn, enough to keep the shopping centre owner in control of its properties and out of the hands of creditors through an expected upswing in consumer confidence, as light loomed at the end of the Brexit tunnel.

Worse, the company’s loan refinancing depended on the new cash injection. On February 26, as market conditions started to turn for the worse, the company announced an amend-and-extend, pushing its October 2021 revolving credit facility out to 2024.

All seven of the existing banks were willing to do the new loan provided Intu could find at least £1.3bn from the rights issue. Following the abandonment of the capital raise on March 4, the company said it had “several expressions of interest to explore alternative capital structures and asset disposals”.



Public interest?

The company is much easier to dismember than a comparable operating business. Most of its debt is secured at the asset level, and each shopping centre it owns can stand alone. There is no vital reason why Manchester’s Trafford Centre ought to be under the same corporate owner as Newcastle’s Metro Centre.

Nonetheless, if concerned citizens can call for airlines, travel agencies, or steelworks to be nationalised, why not the nation’s largest retail landlord?

Part of the justification of those arguing for a Flybe rescue was the airline’s service of regional airports — like Southampton, tucked away a distant 90 minute drive from Heathrow, the largest airport in Europe.

For Thomas Cook, the justification for a putative bailout was preserving jobs — a worthy aspiration, since the ordinary workers bore no responsibility for the corporate mismanagement or CDS shenanigans that left the travel firm insolvent — but a very slippery slope for a government to go down. Keeping a firm’s useful functions going while letting risk taking equity investors bear the pain ought to be the priority in an insolvency.

Owning a landlord is in a different matter. Rather than being a true operating business, where government has no real edge, it’s an investment business, where cost of capital and investment horizon is king.

The UK's local councils, as well as other metropolitan governments like those of Hong Kong and Singapore have long acted as property developers. Having both property and planning under one roof is potent concentration — which can be used for good.

For Britain’s communities, sometimes the “High Street” doesn’t mean the street in the centre of town like in the good old days, but a space like a shopping centre — a gathering point for all manner of leisure activities, a crucial community amenity, the heart of a local area.

Perhaps the Trafford Centre’s mock classical stylings aren’t for everyone, but it’s a hugely popular destination for the good burghers of the Manchester metropolitan area, and there’s a clear community interest in making sure it doesn’t deteriorate during any prolonged corporate restructuring.

For spaces used by so many people in a community, with such a clear local presence, it’s reasonable that the state might want some control over these spaces, especially if it comes at a bargain price.

The crumbling UK retail sector, which has seen dozens of Company Voluntary Arrangements (CVAs) pushing down rent rolls, has hurt the UK's urban landscape. Vibrant shopping districts have become hollowed out parades alternating between charity, chicken and betting shops.

Intu’s centres have partly resisted this collapse, but only partly — rent rolls keep diving and property valuations have crumbled — but ownership from a long-term buyer might preserve what’s good in the UK High Street for longer.

The hapless landlord’s market cap is just £68m at the moment — scarcely more than the £50m it spent to avoid breaching its covenants and losing control of its assets earlier this year — though the firm clearly needs a cash infusion to stay ahead of creditors.

It would be a bold call from a Conservative government — but perhaps it’s time for bold moves.

By Owen Sanderson
10 Mar 2020