Simon says $3.6B Taubman deal will help refresh rival’s malls

Investors on Monday morning leapt aboard the plan from Indianapolis-based Simon Property Group Inc. to buy rival shopping center owner Taubman Centers Inc. for $3.6 billion.

Simon said Monday that its operating partnership, Simon Property Group LP, will buy all of Taubman’s stock for $52.50 per share, which represents a 51% premium to Taubman’s closing price on Friday. In response, investors gave a vote of confidence by bidding up Taubman shares by 53% on Monday morning, to $53.12.

Shares of Simon rose 0.6% by late morning, to $141.83.

Taubman Centers, based in Bloomfield Hills, Michigan, has 26 regional and outlet shopping centers in the U.S. and Asia. Simon owns or has a stake in 204 properties in the U.S.

“We believe that by forming this venture, we can enhance (Taubman’s) growth prospects,” CEO David Simon said in an investors call on Monday morning. “With this partnership, (Taubman) will be in a better position to invest in its properties and create the sort of innovative retail environments that drive traffic. These include immersive opportunities for retailers, and new and exciting shopping and entertainment experiences for our consumers.”

The Taubman family will sell about one-third of its ownership stake at the transaction price and remain a 20% partner in Taubman Realty Group LP, which is the operating subsidiary of its namesake real-estate firm. The Taubman portfolio will continue to be managed by Taubman’s existing leadership team.

Simon said the acquisition will create some “operational efficiencies.” Most of the costs savings, he said, will come from the fact that Taubman will no longer have the costs associated with operating as a publicly held company.

CEO Robert Taubman described it this way: “The context of the deal is essentially a privatization.”

The firms were rumored to have been holding merger talks since late last year.

“A Simon Property Group combination with Taubman Centers would make sense, given the latter’s high-quality, well-located malls and the former’s ability to reinvest in them,” Bloomberg Intelligence REIT equity analyst Lindsay Dutch said in a research note on Tuesday.

The deal sends a resounding message that Simon remains a devout believer in retail real estate, even as the rise of e-commerce has knocked the sector out of favor across the globe. Investors have thrashed the stocks of retail real estate firms, including Simon, whose shares have tumbled 38% since July 2016.

Malls have struggled with retail bankruptcies and store closings after a vast shift in the way Americans shop.

Since 2015, only nine malls have been built, a dramatic fall from their peak construction in 1973 of 43, according to CoStar Group, a real estate research firm.

Last week Macy’s, a cornerstone in many malls, announced that it is closing 125 of its least productive stores and cutting 2,000 corporate jobs. The store closures represent about one fifth of all its locations and are in poor-performing malls. And consortium of buyers, including mall owners Simon and Brookfield Property Partners, bid $81 million last week for Forever 21, the ubiquitous mall staple that filed for bankruptcy protection in September.

Forever 21 happens to be Taubman’s largest tenant, leasing 513,000 square feet of space across 17 properties.

Several years ago, Simon and the company that became Brookfield Property Partners, another big mall operator, teamed up to save struggling teen apparel retailer Aeropostale, which was in bankruptcy.

Traditional malls are adding more entertainment and other non-retail options like restaurants and gyms to create new energy at their properties. They’re also trying to avoid darkened areas inside their properties, which can exacerbate their problems and trigger lease clauses that allow tenants to renegotiate.

The acquisition of a majority stake in Taubman is expected to close by the middle of the year. It still needs approval from two-thirds of the outstanding Taubman voting stock and a majority of outstanding Taubman voting stock not held by the Taubman family.