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Taubman Centers Cap Structure Arb: Heads I Win; Tails I Don't Lose (Much)

Double S Capital profile picture
Double S Capital


  • Simon Property Group is taking Taubman Centers private at $52.50.
  • Taubman's capital structure is pricing in different probabilities of deal closing.
  • Long Taubman Preferred Share vs. Common Stock at a 0.5 hedge ratio can lock in positive return regardless of the outcome of the take-private deal.
  • The hedge ratio can be modified depending on one's view on the deal.

Situation Overview

The largest shopping mall REIT, Simon Property Group (NYSE:SPG) is buying its smaller competitor, Taubman Centers (NYSE:TCO) at $52.50 per share. The J (TCO.PJ) and K (TCO.PK) series of TCO's preferred shares will be redeemed at $25 face value. Common and preferred stocks will continue to pay dividend until the closing date of the transaction. The total required cash consideration from SPG is ~$3.6 billion, and this is expected to come from SPG's working capital and existing credit facilities. For reference, that's about 8.6% of SPG's enterprise value of $42.0 billion.

Probability of Closing

The calculation of the probability of closing being priced in by the different parts of the same capital structure looks more complicated than it really is. See below for a graphic illustration.

For illustration purpose

The only caveat is that the TCO's preferred shares aren't the most liquid securities in the world, so the probability is probably not priced in accurately. In fact, this is probably why this capital structure arbitrage exists - there isn't enough liquidity for large players to price the preferred shares accurately.

The "prices if Deal Breaks" requires some clarification. For the TCO.PJ, I'm assuming the preferred share is going to trade at 8.5% dividend yield ($1.63 / 8.5% = $19.12). SPG also has a preferred stock outstanding, and it's trading at ~6.5% dividend yield. Given that TCO is smaller and more levered, I just arbitrarily added 2.0% premium. Also, it seems like the TCO.PJ snaps back once it dips below $20.

For TCO, $30 is about the 20-day average price before the deal was announced (a.k.a. the unaffected price).

As one can see, the preferred share is implying a 57.5% probability of deal closing, while the common stock is priced in a higher probability at 62.1%.

Capital Structure Arbitrage

This article was written by

Double S Capital profile picture
Event-driven, fundamentally oriented value investor. My favorite quote - if you want to be the smartest person in the room, go to an empty room - something like that.

Analyst’s Disclosure: I am/we are long TCO.PJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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