Blackstone wins Centro malls bid

Blackstone Group, the US private equity firm, has agreed to pay $9.4bn for the US property assets of Australia’s Centro Properties, people familiar with the situation said.

Blackstone beat two other bidders in the final round of the auction: a group including Morgan Stanley, Starwood Capital and Paulson & Co; and a partnership between NRDC Equity Partners and Area Property.

Centro is expected to announce the deal on Tuesday, at the same time as it will probably announce a debt-for-equity swap at its two Australian assets and also a merger of the two, people familiar with the matter said.

The value of the Blackstone deal – which essentially values the company at 77 or 78 cents on the dollar – means some hedge funds that bought Centro debt from the banks for as low as 45 cents will make windfall profits.

The biggest debtholders include some of the most experienced distressed debt investors, including Appaloosa and Davidson Kempner. Meanwhile, another major debtholder is Paulson & Co, which joined the losing Morgan Stanley bid.

“If that price is accurate, then this is a good result for Centro,” said a Sydney-based trader on Monday. “Anything north of break-even is good, given that those assets were worth less than the debt for much of the last few years.”

Centro is carrying $8bn in debt on the 588 US shopping centres and would emerge with more than $1bn after the transaction. It will use the funds to pay down debt on its remaining portfolio of 112 shopping centres across Australia and New Zealand.

Centro amassed its US portfolio in the years leading to the global financial crisis, and was unable to refinance part of its A$16bn (US$16.3bn) debt as the value of assets began to crumble.

Lenders, including 55 hedge funds that own part of the debt, have granted the embattled shopping centre owner several reprieves as it sought to restructure.

Blackstone’s winning bid reflects optimism that the US property market has bottomed and prices are likely to recover, due to what property analysts say is the lowest level of new supply in 30 years.

The US assets consist of strip malls, in which the primary anchor is often supermarkets rather than purveyors of luxury goods. “The operating fundamentals are moving in the right direction,” an analyst said.

Last week, Centro announced an interim net profit of A$553m but Robert Tsenin, chief executive, told analysts that “the need to restructure remains critical”. Mr Tsenin said A$3.1bn needed to be financed by December this year, and added that while the debt extension reached two years ago had bought the company time, it had not solved the problems.

“Across the Centro Group, including Centro and all of its funds under management, there is A$16.5bn of investment property and A$16bn of debt at December 31, 2010,” he said. “This clearly unsustainable capital structure, combined with our exposure to volatile foreign exchange and variable interest rates, presents us with significant financial and operational challenges,” he said.

Centro shares are down 37 per cent from their level 12 months ago, and the company’s market capitalisation has shrunk to A$145m from A$4.82bn.

Centro is advised by JPMorgan Chase and Moelis.