- In light of recent developments, the management team at Simon Property Group has decided to terminate its merger agreement with Taubman Centers.
- The firm's argument about a pandemic makes sense, but recent financial information for the first quarter reveals Taubman at least was holding up well at that time.
- Taubman likely has no real legal recourse and investors in Taubman may have to deal with the pain.
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June 10th turned out to be a pretty bad day for shareholders of Taubman Centers (NYSE:TCO). Investor enthusiasm in the company tanked after news broke that Simon Property Group (NYSE:SPG) was electing to drop its planned acquisition of the firm. This move may seem like a win for investors who thought the buyout of Taubman, announced in February of this year, was at too low a price for the firm, but for investors banking on the deal and the merger/arbitrage opportunity it offered, the pain ended up being significant. Truth be told, Taubman likely has little to no real recourse as a result of Simon’s decision, and investors should probably should just take the hit and move on, but this doesn’t mean that Taubman is a firm investors should move away from.
A look at the news
One June 10th, news broke that Simon was backing out of its side of the deal to acquire Taubman. The acquisition was planned to take place at a price of $52.50 per share, valuing the publicly-traded stock in the company at $3.6 billion. The actual purchase price would have been higher, because of $119 million in Simon’s own operating units that were being transferred as part of the deal and because the purchase did not include the 20% of Taubman stock that the Taubman family presently owns. That 20% would have eventually been traded to Simon after two years in exchange for cash or stock based on the terms of the agreement.
This decision by Simon resulted in a massive collapse in Taubman’s share price. Units closed down more than 20% at $36.17 from the $45.25 they traded at previously. If it is any consolation, the drop could have been worse. At one point in the day, units traded as low as $26.70, implying a drop at one point of 41%. Not only that, but investors were spared some pain as a result of the merger/arbitrage spread that existed. The day prior to the collapse of the deal, Taubman’s stock was at $45.25 per unit, implying a potential gain for speculators if the deal had been completed at the price previously agreed of 16%.
In its statement on the matter, the company cited two reasons behind its decision to cut off the merger. The first of these, I believe, is relevant. The other one is more up in the air. The relevant one is that there’s a clause allowing the merger to be cancelled in the event of (among other things) a pandemic if the pandemic is having a material adverse effect on the firm. Namely, this is being referenced relative to the effect seen on its peers. The other, which is more debatable, relates to Simon’s view that Taubman’s management team has failed to take steps aimed at cutting the company’s costs and its capital expenditures.
Likely no recourse
In response to this development, Taubman issued a statement wherein it said that it received Simon’s notice. It also asserts that its vote for the deal will still be held on June 25th and that it believes the termination is ‘invalid and without merit’. Management plans to contest this by trying to force Simon to complete the acquisition and/or by seeking compensation for ‘monetary damages’ related to Simon’s latest actions. Technically, the terms of their merger do call for termination fees ranging between $46.60 million and $111.85 million, but the termination is unlikely to be rewarded if Simon can convince the court that its argument is valid (as it appears to be).
Because Simon is privy to inside knowledge regarding what all is happening at Taubman during these tough times, we are not so fortunate. All we can rely on is what Taubman has reported so far this year. In its first quarter, it doesn’t look like the company has been affected all that much by the downturn. Revenue, for instance, came in only 0.5% lower in the first quarter than it was the same time last year. This compares to the 6.8% decline seen by Simon. Net income at Taubman actually grew 31.6% year-over-year compared to the 20.2% decline Simon experienced.
The drop in FFO (funds from operations) at Simon of 9.2% was slightly better than the 13.9% decline seen by Taubman, but Taubman’s AFFO (adjusted funds from operations) dropped a paltry 5.2%. Operating cash flow at Taubman grew 1.8% to $43.95 million, while Simon’s declined by 11.5% year-over-year. Though the occupancy rate at Taubman did fall, dropping from 93% to 91.9% over the course of a year, that drop is small. And it’s worth mentioning that these performance figures by Taubman include the impact it saw from the bankruptcy of Forever 21.
By most measures that matter, here, Taubman held up pretty well, especially compared to Simon. This does not mean, though, that the company has not seen a material decline in operations since. The period covered for both firms is the first quarter of 2020, ending March 31st of this year. It wasn’t until March 19th that Taubman’s management team announced plans to close all but two of their locations temporarily. While the firm probably generated a net loss during this window, it’s unreasonable to think that it did not engage in cost-cutting. We also know that management announced plans to defer between $100 million to $110 million in capex as a result of these closures. Because of that, management can likely make a good case that Taubman’s second point is incorrect.
Due to the well-known existence of the pandemic, it’s likely that Simon will be just fine in walking away from the deal. I think, honestly, that while it is possible that Taubman has been hit during this period, Simon’s main reason for walking probably has to do with the fact that the merger was never particularly great to begin with. Though the move would have been accretive to Simon’s FFO, it was already paying a lofty 15 times 2019’s FFO and 14.2 times its AFFO. Simon’s net debt / NOI ratio would have risen from 5.2 to 6.1 as a result, even without factoring in any impacts the firm might have seen as a result of the market’s weakening. This, then, strikes me more as a reason for management to cut off the deal because it just wasn’t great to begin with, than it does for the firm to cut off Taubman because the long-term outlook of the business changed materially.
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This article was written by
Daniel is an avid and active professional investor.He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein. Learn more.
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