Simon Property Group And Taubman Centers: Not All Relationships End Well

Summary

• 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.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Get started today »

June 10^th 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 10^th, 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 25^th 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 31^st of this year. It wasn’t until March 19^th 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.

Takeaway

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.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Comments

[Mr Nobodi]

I would think Simon would pay that breakup fee gladly if that's all it takes for them to walk away. I'm not saying that's the case. Just hard to imagine them fighting to the end only because of that fee.

[EliasMouawad]

@Mr Nobodi There is no breakup fee for Simon. The author got it wrong. If Taubman wanted to walk away, he would have paid a breakup fee. This article is so poor it shouldn't have been published.

[Bgraham75]

I totally agree.

[r cohn]

Traffic in the Bay Area is still down 30-40%. Anyone who has driven on 24 in the East Bay know what a disaster that it is during both morning and evening rush hours. I had a dental appointment in Berkeley both last week and this week . I encountered stop- and - go traffic for only about 30 seconds last week and none this week. Traffic was unbelievably light.
This inevitably translates into less people going to malls than pre Covid-19

[forthelonghaul]

Simon may be actively buying Taubman stock up for well less than what they offered before this thing is settled to lower the price they pay for it just in case they lose in court and decide to do the deal in the end. Seems to me that would be the smart thing to do. Make waves, drive the stock price down, buy up all you can without driving the price back up, and then some of the buyout money goes right back into their own pockets.

[davidwkern]

I think that would be illegal.

[Bgraham75]

is it or isn't it? Are a securities lawyer?

[GOTT Capital]

Malls are packed, consumers want retail despite all the hyped-up fear.

[kiwicarrotcake]

How is TCO not trading below $30 on this...clearly market think deal gets renegotiated...seems like a lot more downside risk then upside.

[allisont13]

Here is what you may have misread, funny if you go to the SEC website; you can scroll right to page 80(who knew... it is a lot to unpack, so without further adieu.)

“Intervening Event” means any material effect, change, event or occurrence arising after the date hereof that (i) was not known or reasonably foreseeable to the Titanium Board or the Titanium Special Committee as of the date hereof (or, if known, the consequences of which were not reasonably foreseeable) and (ii) does not relate to any Acquisition Proposal; provided, that in no event shall the following constitute, or be taken into account in determining the existence of an Intervening Event: (A) the fact alone that Titanium meets or exceeds any internal or published forecasts or projections for any period, (B) changes in the market price or trading volume of Titanium Common Stock, in and of itself, after the date hereof, or (C) changes in conditions in the industries in which Titanium and its Subsidiaries conduct business, except to the extent such changes had a materially disproportionate effect on Titanium relative to other companies of a similar size operating in industries in which Titanium and its Subsidiaries conduct business.

“Knowledge” means, with respect to the Titanium Parties, the actual knowledge of Robert S. Taubman, William S. Taubman, Simon Leopold, Chris Heaphy, Holly Kinnear and/or Eric Smith.

“Lien” means, with respect to any property or asset, any mortgage, deed of trust, lien, license, pledge, charge, security interest, encumbrance, claim, hypothecation, option, right of first refusal, right of first offer, right-of-way, easement, servitude, or conditional sale agreement, and includes any agreement to give any of the foregoing in the future, and any contingent sale or other title retention agreement or lease in the nature thereof.

“Material Adverse Effect” with respect to any Person means any effect, change, event or occurrence that, individually or in the aggregate, has a material adverse effect on the business, assets, liabilities, results of operations or financial condition of such Person and its Subsidiaries (and its unconsolidated joint ventures), taken as a whole; provided, however, that none of the following, and no effect, change, event or occurrence arising out of, or resulting from, the following, shall constitute or be taken into account, individually or in the aggregate, in determining whether a Material Adverse Effect has occurred or may occur: (i) changes generally affecting the economy, credit or financial or capital markets, in the United States or elsewhere in the world, including changes in interest or exchange rates; (ii) changes generally affecting the industries in which such Person and its Subsidiaries operate; (iii) changes or prospective changes in Applicable Law or GAAP or in accounting standards, or any changes or prospective changes in the interpretation or enforcement of any of the foregoing, or any changes or prospective changes in general legal, regulatory or political conditions; (iv) changes caused by the announcement or performance of this Agreement or the consummation of the Transactions, including the impact thereof on relationships, contractual or otherwise, with customers, suppliers, distributors, partners, employees or Governmental Entities, or any litigation arising from allegations of breach of fiduciary duty or violation of Applicable Law relating to this Agreement or the Transactions (provided that this clause (iv) shall not apply to the use of Titanium Material Adverse Effect in any representation or warranty explicitly addressing the execution, delivery, announcement or performance of this Agreement or the consummation of the Transactions or non-contravention with contractual or legal obligations or any condition to Closing as it relates to such representations and warranties); (v) acts of war (whether or not declared), sabotage or terrorism, or any escalation or worsening of any such acts of war (whether or not declared), sabotage or terrorism; (vi) volcanoes, tsunamis, pandemics, earthquakes, floods, storms, hurricanes, tornados or other natural disasters; (vii) any action taken by such Person or its Subsidiaries that is required by this Agreement or with the prior written consent or at the written direction of another Person in accordance with this Agreement, or the failure to take any action by such Person or its Subsidiaries if that action is prohibited by this Agreement; (viii) changes resulting or arising from the identity of, or any facts or circumstances specific to, the Silver Parties; (ix) changes or prospective changes in such Person’s or its Subsidiaries’ credit ratings; (x) changes in the price or trading volume of the such Person’s common stock; (xi) any failure to meet any internal or public projections, forecasts, guidance, estimates, milestones, budgets or internal or published financial or operating predictions of revenue, earnings, cash flow or cash position (it being understood that the exceptions in clauses (ix), (x) and (xi) shall not prevent or otherwise affect a determination that the underlying cause of any such change or failure referred to therein (to the extent not otherwise falling within any of the exceptions provided by clauses (i) through (xi) hereof) is, may be, contributed to or may contribute to, a Material Adverse Effect); provided further, however, that any effect, change, event or occurrence referred to in clauses (i), (ii), (iii), (v) and (vi) may be taken into account in determining whether or not there has been or may be a Material Adverse Effect to the extent such effect, change, event or occurrence has a disproportionate adverse effect on such Person and its Subsidiaries, taken as a whole, as compared to other participants in the industries in which such Person and its Subsidiaries operate.

* (vi)- see you in court, Mr. Simon... bring a lawyer that is fluent in law: May I suggest Alan Shore or Denny Crane.

[BULRUN100]

Dividend announcement after the close?

[allisont13]

They announced dividend suspension of common on June 5, 2020.
Preferred (J- 0.40625 per share,K- 0.390625 per share) were being paid June 30 to shareholders of record X 6-15-2020.
Yesterday was last trade day to settle pre X date.

[BULRUN100]

@allisont13 Fake NEWS was NOT suspended in faked David guaranteed not a 50% cut. Odds are $1.50.

[allisont13]

Well, hmmm...OK. the payouts occur on June 30. (Per Taubmancenters.com press release.)
Let me know how you do?

[Trublu]

I shorted TCO 35 SEP at a 6.0 bid. It is now 3.5 while the equity has only appreciated .70. I think that was the play.

[John Naccarelli]

I expected SPG to wiggle out of this deal more than a month ago. A month after this acquisition was announced, SPG had buyer's remorse and a lot of regret. They have been looking for a loophole and legal way out of this for the past 3 months. TCO and MAC are both heading south.

[rbaa1]

Really, because in the past two months, MAC has rallied off it's $4 low to above $10. Buyer's remorse and regret are too bad, so sad. I'm pretty sure that SPG will regret doing the cancellation more. Just IMO, as karma is a....

[imeldo marcos]

Nah....... They overpaid. Spg can just buy the share at market price.

[Tudor Invest Holdings]

This will likely be great fodder for lawyers for years to come.

It's a stark reminder to people to hold the champagne on ice until the cheque has cleared in your bank account

[allisont13]

WOW! Got any access to an, uhm, computer that actually can go to the Googler?

Try looking up Taubman-Simon 2003, I'd wait, but I'm not sure how long it will take you. If you run to the Library, they will let you use their computers (may or may not be open, pandemic.). If that doesn't work, trade your flip phone for a smart phone... by some coincidence flip phones were in vogue the last time these two were duking it out in court.
I don't think your editorial direction will change, but these two companies have weird rivalry and the only real difference between 2003 and 2020 is the total dollars that Simon was/is(was, now; I think) offering. Neither company is afraid to pay their lawyers to put their own financial interests above the other.

You might be interested to know that Taubman also has a legal action against them, because a few lawyers felt that the 51% premium that brothers T. managed to negotiate wasn't good enough for their potential marks, I mean clients(Look up Simon Taubman 2020 merger, also on the Googler.). How many more passengers will that train pick up, if they negotiate a lower price??

Don't worry, this will all get worked out. Simon has wanted Taubman expertise in premium real estate locations, collecting higher rents and knowledge of when to get out and flip the properties they no longer wish to own, and Robert and William still want to play in real estate.

[Ivan Mutaftchiev]

Daniel, I hate to do this to a fellow SA writer, but the other comments are correct. You are reading the merger agreement the wrong way.

[EliasMouawad]

@Ivan Mutaftchiev It would be better if Daniel focuses on oil stocks and doesn't write poor articles regarding malls.
Long SPG

[J. Pendleton]

Simon Property Group filed its lawsuit against Taubman in Oakland County, Michigan, which is the county in which Taubman has its headquarters. I presume that Taubman enjoys a good business reputation in Bloomfield Hills, Oakland County, Michigan, where this legal dispute will be adjudicated. In its 8-K filed yesterday, Taubman made plain its determination to enforce the merger agreement and to seek a remedy of specific enforcement of the contract or alternatively monetary damages from Simon. As the old saying goes, there are always two stories to be told in any lawsuit--and this case is no different. In my limited reading of the merger agreement, it is fairly clear that Simon must resort to a factual presentation in court regarding whether there has been a "disproportionate effect" upon Taubman as compared to other participants in the industries in which Taubman operates. There will be disputes over the meaning of terms such as the "industries" in which Taubman operates. Both sides will bring expert witnesses to expand on these issues and provide competing narratives. At this stage it is premature to say who will win but Taubman has "home court advantage" in the resolution of this legal fight. Today's stock market suggests that Mr. Market is voting that Taubman's chances at legal success are decent.

[Reitinvestor18]

Your analysis is flawed on so many levels. First off, David Simon has been chasing TCO for longer than most can remember and he would have never entered into the deal paying a huge premium if he didn’t want to buy the assets. So to say that the deal was never a good deal and some how David, who is the best of brightest CEO of all retail REITS, reconsidered, is just absurd. Secondly, SPG really doesn’t have a legal leg to stand on with their claims in why they are terminating they deal. How was the impact of COVID somehow greater to TCO than their peers??? Newsflash —-IT WASN’T. It was the same for all malls. It was terrible, but SPG does not have rights to terminate the deal simply based on the fact that there was a pandemic. Bottom line is that David still wants the assets of TCO but certainly not at the price he was willing to pay pre-COVID. He needed leverage to renegotiate the deal and now he created leverage. Billy and Bobby can either decide to fight this out in court (lots and time and lots of money) or sell at a lower price. My bet is they sell at a lower price, cash the check and move on with their lives. They wanted out of the business before COVID and I can’t imagine why they would want to deal with all the headaches running the business now.

[Wentworth09]

well, things change very fast in 2020, when you can buy malls at bankruptcy court at a much cheaper price, why would you pay much more to acquire a company. PEI, CBL and a bunch of other mall REITs are not likely to make it in this downturn, the market value for TCO without this acquisition, should be near MAC -- below 10 USD per share. why would you pay 4-5 times more than that, unless TCO agrees to renegotiate the price at near 20 per share range, SPG is not likely to return to the table.

Plus, so many examples of backing out from a deal, like a month ago LB sell Victoria Secret to private equity, deal was signed, then booming private equity decided to back out, LB didn't even get a dime.

[r cohn]

Just a question for all TCO shareholders. Would you accept a much lower price without joining a class action lawsuit vs the TCO board of directors .
Well , there are some large players on Wall St who have been hurt by SPG s announcement. Obviously there is risk in playing any deal, so there is little recourse against SPG.
But as holders of TCO stock , these large holders can and will sue the board of directors for failing to secure the best price for its shareholders, if the deal is done at a lower price.

[r cohn]

SPGs strategy is obvious.
It is hoping that the penalty plus legal costs will be less than overpaying for TCO

[hitman1981]

I think it's more to renegotiate because TCO would have to explain to its shareholders why the stock drops to the teens if they don't.

[TommyIrish]

SPG is no better than the smash-and-grab looters in Manhattan LESS their moral fiber and respect for the law.

[dennis rfm]

The arbs that bought TCO and shorted SPG are getting a big break today with the stock down $11. However they probably lost a ton on their TCO position so it evens out if they haven't already covered. It is situations like this which make being an arb a very tough job.

[r cohn]

The deal was an all cash deal , so there was/is no direct relationship between TCO stock and SPG stock as there would have been in a stock deal.
In all cash deals arbs usually just buy the target(TCO).
By arguing that arbs have shorted SPG while buying TCO implies that the arbs have taken a position not based upon the SPECIFIC TERMs of the deal but on their opinion on SPG stock.
MERGER/ ARBITRAGE is a mathematical game with the winners best able to determine the chances of a deal going through.
In addition selling SPG would tie up large amounts of capital

[BULRUN100]

Deal gets done cash and stock at about $40 per share. It's stupid the TCO wouldn't renegotiate KNOW they be halved by NIT doing so. Very stupid!

[BULRUN100]

That TCO...... KNOWING and NOT damn fat finger.

[Trublu]

$40 a share? So just gonna lob off 720million? I mean as long as the stock is over 35 by October I’m good but I certainly wouldn’t settle for a 720million dollar discount if I had a signed contract with specific language negating coronavirus.

[Merchant of Death]

@BULRUN100

"Deal gets done cash and stock at about $40 per share. It's stupid the TCO wouldn't renegotiate KNOW they be halved by NIT doing so. Very stupid!"

Fat fingers or otherwise ... just curious:

Why the Eff would we be selling our TCO for $40 (after "re-renegotiating" the price with DAVID SIMON from $62 to $57, and from $57 down to $52/share, SPG's BEST and FINAL OFFER, according to DAVID SIMON). With DAVID SIMON finally tossing in a couple of quarters, you know, about the amount you'd tip your shoeshine guy.

Or, an even better example:

50 cents, the amount you, or a DAVID SIMON type guy, would tip your amazing REGULAR bartender. You know, the kind of bartender who REGULARLY "over-pours" your drinks "a bit", or often brings you in your favorite drink and tells you that "these are on the house." You know, the kind of bartender that any connoisseur of alcoholic beverages would LOVE to have." $0.50. Big Spender. But, allow me to clarify - that's a 50 cents tip, NOT for one drink, but for the ENTIRE NIGHT. Because that's the kind of guys that DAVID SIMON is, he's finally crying "Uncle" and agreeing to toss in that extra, $0.50 per share, to $52.50/share. FINAL OFFER, DONE DEAL. SIGNED, SEALED and DELIVERED. No tap-backs. No crossing fingers or other shenanigans.

Now, however, you're talking about $40.00. Not something that's a doubke digit numbmer starting with a $4, something that's got a "$Forty-handle (i.e., $40 to $50 bucks/share) attached to it. Nah, not you, not @BS Running Down My Pants. @BS RUNNING is more of a DAVID SIMON type, a REAL BIG TIPPER.

Fave example:

Kid is going out on a very special Date with this VERY HOT gal, and he asks dear old Dad (DAVID SIMON), "Daddy DAVID, can I have $50 for tonight's date with this (VERY CUTE, AMAZINGLY BEAUTIFUL) young lady. And Daddy DAVID says (re: the $50.00):

$40 dollars?!
What [WTF] do you need$ 30 Dollars for?!
Here's a $20.
Bring me back a $10.
And don't forget to put $in 5 bucks of gas for using my car.

So ... $40 Dollars. Hmm. On an Agreement that's 90 or 100 pages long!

Can you imagine how many trees were KILLED to draft, re-draft, red-line, re-redraft, go downtown to the printers, get the red-herring copy, new rough draft copy, newer close to final copy, and on and on. With all of the repeated copies that the execs, the attorneys, the shareholders (at least the ones still receiving paper copies), after EVERYBODY's gone through, if you were to set the "Over/Under Line" at a quarter-million pages worth of trees that have been killed (so far), please put me down on the OVER.

But as with Daddy DAVID SIMON, why stop at $40? Why not just save a few extra trees and get down to the REAL, SUPER EXTRA HEAVY DUTY, NO TAP-BACKS, 100% GUARANTEED, NO OUTS, NO MACs, NO SHENANIGANS, COMPLETELY "Square-Biz" deal. Let's just agree. Or re-agree (again) to:

Wait for it ...

Not a Contingent Value Right (i.e., a "CVR"). Nope ...

Not a BRAND NEW CAR! Nah ...

Let's just nail this thing down for real.

Let's Re-Re-Agree to FINALLY AGREE to ...

Twelve Dollars. AND fifty cents (for that bartender's weekly tip) ... AND

DAVID SIMON will even give you a HIGH-FIVE!

And if you ask him really nicely, he might even toss you a free "handy."

See, that way you don't need to ask dad for Fifty bucks for that "really hot date." DAVID SIMON can hook you up ... with his hand(s).

Thanks, DAVID SIMON!

[Gary Kime]

The market is clearly saying that TCO is the winner today and SPG is the clear loser. I’ll go with a lot of smart investors verses the SA commentary!

[hitman1981]

But the market had the takeover going through as it prived TCO at 45, while SA commentary has been saying SPG will renegotiate or walk away. Commentary was right.

[johnnygibber]

It’s tough to make predictions , especially about the future - yogi bear... or booboo...

[Tudor Invest Holdings]

@johnnygibber

I believe this quote actually originates from the Danish physicist Niels Bohr

LR