With malls shut, what happens to Simon and Taubman’s deal?

Taubman’s stock has plunged below the agreed-upon transaction price

Robert Taubman and David Simon (Credit: Donato Sardella/Getty Images, Mireya Acierto/Getty Images, iStock)
Robert Taubman and David Simon (Credit: Donato Sardella/Getty Images, Mireya Acierto/Getty Images, iStock)

In mid-February, Simon Property Group announced it would acquire Taubman Centers after a nearly two-decade-long dance between the two rival mall owners.

But as Covid-19 raced around the globe, bringing municipalities and states to a standstill, Simon and Taubman announced that they would temporarily close their properties to slow the contagion.

The news has shaken investors, who have been concerned about the deal moving forward, analysts said. The transaction is set to close later this year.

“I think a lot of investors wish that they would [pull out],” said Haendel St. Juste, managing director at Mizuho Securities USA. “But the merger agreement seems fairly iron-clad.”

Mizuho set up a call with investors and a mergers and acquisitions expert to answer questions about the deal. Investors were wondering about the timing of the transaction and the need to get it through the door, St. Juste said, particularly as a few days after the deal was announced, the coronavirus began taking over Italy.

In a research note, Mizuho said it seems unlikely the pandemic would trigger Simon to exit the agreement through its “material adverse effects” clause. Simon would have to prove, in court, that the pandemic has had a “disproportionate impact” on Taubman in comparison to its peers — in other words, a long-lasting effect. Taubman said it was closing its malls a day after Simon said it would, and Taubman’s two malls in China have already re-opened.

There also is no “force majeure” clause in the agreement that would provide an exit because of unforeseeable circumstances, and there is no financing risk — Simon has already raised the debt capital it needs, the note said.

Simon did not return a request for comment, and a Taubman representative declined to comment.

On Feb. 10 Simon announced it was acquiring an 80 percent stake in Taubman, including the high-end Mall at Short Hills in New Jersey and the Dolphin Mall in Florida, at $52.50 per share. Taubman will keep the rest of the ownership.

Shortly after, the coronavirus outbreak escalated in Italy and throughout Europe, leading to a broad-based sell-off in the public markets as investors digested the news of the virus triggering a global recession. In March, when the virus had become front-page news but before Taubman, Simon and other mall landlords closed their properties, analysts at SunTrust Robinson Humphrey in a note said Taubman’s declining stock price was “suggesting some concern” about the probability of the deal closing. But ultimately, the analysts said the deal was still highly likely to go through.

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SunTrust declined to comment further this week.

Simon and Taubman, giants in a sector already troubled by changing consumer preferences and retailer closures, have been hit hard by the coronavirus. As of Tuesday night, Taubman’s stock price had sunk about 20 percent below the agreed deal price, and Simon is underperforming the broader market and a real estate investment trust index, according to Mizuho.

Simon has suffered “a disproportionate amount of pain,” St. Juste said. “I think not only the fact that [the market’s] down, but retailers have an additional challenge here, and then they’re adding the weight of acquiring a portfolio in the middle of all of this.”

Alexander Goldfarb, managing director and senior research analyst at Piper Sandler, said it is difficult to imagine the deal not closing because it has been decades in the making and would create long-term value.

Taubman fought off a hostile takeover bid from Simon and Westfield (now Unibail-Rodamco-Westfield) in 2003, and industry watchers have long said that Simon and Taubman would be better together.

“It is a deal that gets [Simon] 10 of the best malls in the country,” Goldfarb said. “There’s no out mechanism for Simon, so that would be some pretty intense litigation.”

The mall closures should not have an adverse impact on the firms’ fundamentals in the long run, said Goldfarb, who views the pandemic as a short-term hurdle.

He added that if the firms’ top malls “don’t overcome this, the country’s got much bigger issues.”

Shortly before noon Wednesday, as markets were lifting after Congress struck a deal for a $2 trillion stimulus, Taubman’s stock was trading at $45.59 and Simon’s was at $59.31.

Write to Mary Diduch at md@therealdeal.com and Rich Bockmann at rb@therealdeal.com