Simon Property Cites Pandemic to Nix Deal With Rival Taubman

(Bloomberg) -- Simon Property Group Inc.’s termination of its $3.6 billion purchase of rival mall owner Taubman Centers Inc. hinges on the coronavirus pandemic.

The deal, for $52.50 a share, was announced Feb. 10 after months of negotiations. At the time, China was grappling with a virus that was still about a month away from shutting down the U.S. economy.

Now, Simon says it is terminating the deal. In court papers, the company argues that the two sides explicitly agreed that a pandemic would be grounds to scrap the purchase, if it disproportionately affected Taubman “compared with other participants in the retail real estate industry.”

“While Taubman’s shopping centers are now beginning to reopen, they are
emerging in a fundamentally changed environment,” Simon said in a court filing. “Taubman’s properties are uniquely vulnerable to the post Covid-19 retail environment for a multitude of reasons.”

Simon is asking a court in Michigan, where Taubman is based, to declare that the purchase has been “validly terminated.”

Taubman, meanwhile plans to “vigorously contest” the termination of the deal, according to a statement the company released on Wednesday.

“Taubman believes that Simon’s purported termination of the merger agreement is invalid and without merit, and that Simon continues to be bound to the transaction in all respects,” the company said.

Upscale Malls

Simon, which has one of the industry’s strongest balance sheets, has pursued acquisitions for years as a growth strategy, making unsuccessful offers to buy rivals including GGP and Macerich Co. It also previously went after Taubman.

Simon has long coveted Taubman’s portfolio of upscale malls, including Beverly Center in Los Angeles and Dolphin Mall in Miami. The February deal was seen as a way for Simon to bulk up and buttress against the increasing rise of e-commerce, which has made it hard for malls to draw customers who can conveniently shop from their couches.

It didn’t take long after Simon’s purchase was announced for doubts to emerge about the deal. Taubman’s shares have traded below $52.50 since March 4, and as social-distancing guidelines ravaged U.S. retail, analysts and industry observers speculated that Simon would seek to lower its bid.

Analyst said Wednesday that the move to terminate the deal could be a negotiating tactic to pressure Taubman back to the table.

“Our view based on how late in the process Simon acted is that they were just trying to get a better price and they decided that they would do litigation to see if they can come up with something better,” said Alexander Goldfarb, a analyst at Piper Sandler.

Simon Property Cites Pandemic to Nix Deal With Rival Taubman

Taubman’s shares plunged more than 40% after the statement was released, before paring the losses. The stock finished Wednesday down about 20% at $36.17, the biggest single-day drop since December 2008.

Simon also dipped on Wednesday, sliding 4% to $83.01. The stock had rallied recently on hopes for a faster than expected economic recovery.

The termination fee for the deal is approximately $112 million, with Taubman to pay Simon under certain conditions.

Lower Price?

Taubman could try to force Simon to close the original deal, but it might make more sense to work something out at a lower price, according to James Sullivan, an analyst at BTIG.

“The downside in Taubman shares might be as low as in the 20s if the deal didn’t close,” Sullivan said. “They have every incentive to negotiate a price cut and the question just becomes how much is appropriate.”

Prospects for bricks-and-mortar retail have changed dramatically since the deal was announced. Stay-at-home orders to curb the spread of Covid-19 have shuttered stores, pushing more consumers online.

Landlords, already pressured by declining foot traffic and retailer bankruptcies, may face a wave of new vacancies as the pandemic forces more tenants out of business.

Bad Shape

While Americans stuck inside for months have shown a willingness to return to stores, there are major challenges ahead for enclosed malls.

Simon argued that Taubman had failed to make “essential cuts” in operating expenses and capital expenditures. It also said in a court filing that the properties it agreed to purchase face a tough road.

Taubman’s malls 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 said.

The case is Simon Property Group v. Taubman Centers Inc, 2020-181675-CB, Oakland County Michigan Circuit Court, (Pontiac).

©2020 Bloomberg L.P.

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