This article was previously published in the July 2020 edition of the Forbes Real Estate Investor
Simon Property Group (SPG), a top five real estate investment trust by market capitalization, credit rating and square footage, made headlines early in 2020 with a proposed $3.6 billion takeover of Taubman Centers, a combination of two premier U.S. mall owners.
The expression “timing in everything” has rarely been more applicable.
Although the coronavirus was making headlines overseas, it wasn’t until right after the proposed transaction that it began crippling Italy, and three weeks later, lockdowns were applied throughout the U.S.
As non-essential businesses were forced to close doors nationwide, already vulnerable apparel companies, movie theaters and fitness chains slid into bankruptcy. Social distancing, sanitization and other measures were impossible to maintain in the trophy malls serving as the chief pillars of Simon and Taubman’s operations.
The expression perfect storm is overused but applicable.
Fortunately for Taubman shareholders, Simon’s $52.50 bid kept its shares afloat while peers massively underperformed the S&P 500. In fact, Taubman, shown below in light blue, has outperformed the S&P 500 by 25 percent year-to-date despite its membership in one of the worst performing sectors. Simon and the Macerich Company, another mall peer, declined in value by 56.7 percent and 68.3 percent, respectively, over the same period.
Less established peers, such as CBL Property & Associates and Washington Prime Group, have fared much worse.
EARLY INDICATIONS OF BUYER’S REMORSE
Despite including pandemic language and terms generally favorable to Taubman, the market increasingly discounted the deal closing as represented by TCO’s decline to well below the buyout price.
Subtle commentary from Simon’s CEO during its first-quarter conference call first indicated the deal may be in contention, “let me turn to the Taubman transaction. As you know, we announced a transaction with Taubman on February 10, 2020 and we will not make any comments or provide any updates on this call about the status of the Taubman transaction.”
After analyst Christy McElroy persisted for an update, David Simon’s response suggested she’d have to wait for a formal announcement. Without explicitly stating it, he signaled unexpected news. An announcement of Simon backing out of the deal came soon after, on June 10.
HOW DURABLE IS THE AGREEMENT?
Analysts have described the agreement as ironclad, indicating Taubman was originally in the driver’s seat. We obtained and reviewed a scanned copy of the complaint filed by Simon filed with the State of Michigan’s 6th Judicial Circuit Court.
Pandemics are specifically excluded as justification to terminate the merger though the contract does contain the traditional “material adverse effects” clause. Without getting too deep in legalese, the argument is Taubman’s portfolio and actions (or lack there-of) caused it to be disproportionately negatively impacted by Covid-19.
Specifically, Simon claims Taubman is “…uniquely vulnerable to the post Covid-19 retail environment for a multitude of reasons, including because they are primarily indoor properties that many consumers will avoid, are heavily dependent on a tourism industry that has been decimated, serve wealthy consumers who are now more likely to shop online and feature high-end upscale stores that are suffering heavily from the economic effects of the pandemic.”
Simon also has issues with Taubman’s portfolio and claims it is uniquely susceptible to the current crisis due to the above-average 80 percent concentration of indoor malls and lack of “power centers” with better performing tenants such as Home Depot and Target. Countering Simon’s claim is Taubman’s significant and well-documented cost reduction plan.
RECENT UPDATES & PROBABLE OUTCOMES
A person familiar with the matter told MSN there were no discussions about renegotiating the transaction at a lower valuation. We consider it noteworthy that Simon has been trying to buy Taubman for nearly 20 years.
While exact intentions are unknown, we can reasonably assume Taubman wants to exit completely or negotiate for a lower share price or the exchange of Simon stock for cash.
Simon hasn’t provided a formal update beyond the initial termination notice. Taubman announced on June 25 that 99.7 percent of shareholder votes were cast in favor of the agreement, signaling they’ve met all requirements of the merger agreement.
With no merger tailwinds, a peer comparison suggests TCO is worth $15.00 to $25.00 per share if the deal evaporates with no penalty or benefit to Taubman compared to a current share price of $38.50.
If Simon pays the original premium of $1.35 billion, TCO should trade 30-40 percent higher. The situation is more complex but less meaningful for Simon; $1.35 billion, even with the stock at 11-year lows, is less than 6 percent of its market capitalization. At Simon’s 52-week high, that metric drops to 2.3 percent.
A court date in mid-November will provide the next installation of the Simon-Taubman saga.
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Mall Meltdown Coming
I own shares in SPG.