Simon Property Group (NYSE: SPG) and Taubman Centers (NYSE: TCO) have avoided a court battle set to begin this week by agreeing to a modification of their original merger agreement. Simon, the top mall real estate investment trust (REIT), announced in February it would acquire the smaller mall operator in a deal that would have valued Taubman at $52.20 per share, a 51% premium at the time.
Simon had a change of heart in June and sued Taubman to exit the deal, alleging that Taubman had not done all it could to respond effectively to the COVID-19 pandemic. Taubman fired back with a countersuit that was finally about to come to trial in November.
A new deal for a changing environment
The terms of the new deal include a purchase price of $43 per share, for a total estimated at around $3 billion. Simon will take an 80% ownership interest in The Taubman Realty Group Limited Partnership, and the Taubman family will own the remaining share. The deal is expected to close by early next year, pending shareholder approval. Per the terms of the agreement, Taubman will not pay a dividend on its stock before March 2021. Simon saves approximately $800 million per the terms of the new arrangement and avoids what could have been a long, expensive legal throwdown.
The news comes after Taubman released third-quarter earnings that included a 30% drop in funds from operations (FFO) from $0.86 to $0.60 per share. It earned $19.3 million in lease termination revenue. Leased occupancy was down to 91.1%.
By comparison, Simon's third-quarter FFO was down to $2.05 per diluted share compared to $3.05 per diluted share one year ago. Its occupancy rate was 91.4% as of the end of September. What Simon does have is money; it reported it has $9.7 billion in liquidity, including $1.5 billion in cash.
That, however, hasn't stopped it from deciding some malls aren't worth the fight. Last week it decided to hand the keys back for the Mall at Tuttle Crossing in Dublin, Ohio, and the Southridge Mall in Greendale, Wisconsin. It will be giving up interest in two other malls as well.
Simon is also close to completing its purchase of J.C. Penney (OTC: JCPN.Q) with Brookfield Property Partners (NASDAQ: BPY). That deal is expected to close by the end of the year. Simon bought Brooks Brothers in a separate arrangement with Authentic Brands.
Not the only ones making up at a discount
Many mergers and acquisitions planned before COVID-19 have fallen apart, especially in the retail space. L Brands (NYSE: LB) was set to sell off the Victoria's Secret brand to Sycamore Partners. That deal fell apart and also led to a lawsuit that was eventually terminated as the almost-partners agreed to go their separate ways.
LVMH Moet Hennessy Louis Vuitton (OTCMKTS: LVMUY) had agreed to buy Tiffany & Co. (NYSE: TIF) for $135 per share nearly a year ago. LVMH said in September it was abandoning the deal and setting up a series of lawsuits. The two brands made it to the table before the suits commenced and inked a revised agreement, with LVMH paying $131.50 per share, a price chop of around $425 million. The sale should close in 2021, and a scheduled quarterly dividend of $0.58 per share will be paid to Tiffany shareholders in November.
The Millionacres bottom line
Investors may see this as a sign Simon is optimistic about the future of retail. Still, there are concerns the mall REIT could be overextending itself during a period of particular uncertainty. The deal adds 26 shopping centers in the U.S. and Asia to Simon's portfolio. The Taubman properties are premium malls in strong locations, but in these iffy times for retail, every bit of square footage represents both an opportunity and a liability. Luckily, Simon's size and solid balance sheet should carry it through just fine.