February 11, 2020

Breakingviews: U.S. mall royalty deal ends with a thud

by Breakingviews.

Two mall dynasties have finally made it to the checkout. Simon Property is paying $3.6 billion to acquire Taubman Centers, some 18 years after it first approached its smaller family-run rival. What would then have been a glamorous union now looks more like a marriage of convenience.

Back in 2002, Simon – also run by an eponymous family – offered to take over its rival along with fellow bidder Westfield America, and when rebuffed, the company went hostile. Things got messy: the Taubman family at one point enlisted the governor of Michigan to fight off the fellow magnate. A change in state takeover laws allowed the family, whose patriarch Alfred Taubman had been in jail after an auction-house price-fixing case, to block the deal even though the majority of shareholders had approved it.

Simon will take an 80% ownership interest and gain locations in areas like Beverly Hills, California and Short Hills, New Jersey. The Taubman family, which holds a different class of stock from public shareholders, will stick around with a stake of 20%. While Simon has had to wait nearly two decades, it hasn’t had to pay through the nose. The company said its cap rate, the relative metric real estate companies report to show the price versus rent yields, would be north of 6%. That is roughly in line with the price Brookfield Property paid for General Growth Properties in 2018. The 51% premium means the offer is equivalent to where Taubman Centers’ share price was roughly a year ago, but still more than one-third less than its peak in 2013.

It’s not just the Taubman family’s willingness to do a deal that has changed. Malls and retail are in trouble. While Taubman is known for catering to the more prestigious outlets like Nordstrom and Neiman Marcus, even those luxury purveyors are unprotected, as Barneys New York’s recent bankruptcy shows. Measured by total shareholder return, Taubman was down 45% over five years by the end of last week, while Simon had declined more than 10%. Sometimes in real estate, a buyout like this can signal the market has reached a turning point. The revival of this vintage deal looks more like a sign that it hasn’t.

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