Retail Apocalypse Hits High End Malls, Leading to Landlord Deal

(Bloomberg) -- The fallout from the retail apocalypse is putting pressure even on high-end malls.

As bankruptcies and store closures pile up among brick-and-mortar retailers, investors are increasingly concerned about mall operators. For the most part, those worries have centered on the landlords who operate dying malls.

But as shoppers increasingly opt to to stay home and embrace the convenience of online shopping, concern has extended to Simon Property Group Inc. and Taubman Centers Inc., high-end landlords that have each seen their shares hammered over the past year.

Now, the rivals are poised to fight the retail woes together. On Monday, Simon announced it’s buying Taubman for $3.6 billion-- a bid to expand by gobbling up a competitor.

With malls under pressure to give customers a reason to leave their couches, they’re being forced to make costly improvements to the properties and add attractions like better dining options.

Taubman, which owns about two dozen malls, needs to reinvest in its U.S. properties and Simon could help provide the capital required to do so, according to Lindsay Dutch, an analyst at Bloomberg Intelligence.

“For Simon, it’s really just about getting the prized assets,” Dutch said.

Simon and Taubman each have better properties than their rivals, with malls in affluent areas that haven’t struggled as much as the rest of the industry. Still, it’s all relative. A Bloomberg Index of North American mall operators was down 40% over the past year through Friday’s close. And while Simon and Taubman were the top two performers, their shares had slipped 23% and 30% respectively, a sign of growing investor unease.

With its smaller competitor under pressure, Simon saw an opportunity to add valuable properties to its portfolio.

“The industry is at an inflection point,” said Craig Johnson, president of the retail consulting firm Customer Growth Partners. “The people who act aggressively in times of weakness are able to capture outsize returns.”

Simon, the biggest U.S. mall company, has flirted with other acquisitions in recent years. It previously tried to purchase Taubman as well as fellow mall real estate investment trust Macerich Co.

Elsewhere in the industry, there’s been consolidation. In 2018, Unibail-Rodamco SE acquired Westfield Corp., while Brookfield Asset Management Inc. bought mall operator GGP Inc.

Simon and Taubman had been holding on-and-off discussions about a deal since late last year. The agreement would mark the end of family control of Taubman, one of the pioneers of the American mall industry. Founder Alfred Taubman was one of the first developers to capitalize on the explosive growth of America’s suburbs. He built an empire of highly successful upscale regional malls, including The Mall at Short Hills in New Jersey and Beverly Center in Los Angeles.

Taubman’s shares surged on Monday after the deal news hit, jumping as much as 54% to $53.25. That’s above the deal price of $52.50, indicating investors think another bidder could emerge.

While that scenario is possible, it’s not likely , Dutch said.

“Simon has gone after Taubman before and it would be unlikely they would go after it again thinking that they wouldn’t get it,” Dutch said. “There’s always a possibility that someone else could come in, but I don’t think that any of the other mall REITs could really offer a superior bid.”

To contact the reporter on this story: Natalie Wong in New York at nwong133@bloomberg.net

To contact the editors responsible for this story: Craig Giammona at cgiammona@bloomberg.net, Christine Maurus

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