Simon Property Group had pursued Taubman Centers Inc. over nearly two decades when the two finally agreed to come together in February — and now the engagement has soured in the era of the coronavirus.
Simon is looking to leave Taubman at the altar — while Taubman is arguing that promises were made and have to be kept. It all leaves the $3.6 billion deal up in the air — joining a string of others derailed by the pandemic.
The fallout shows just how dramatically the landscape has shifted with the COVID-19 shutdown, the slow and tentative reopening and the economic fallout that’s expected to linger for years.
In the end, Simon decided Taubman was suddenly too reliant on high-end retailers, tourism and indoor malls and had not cut back enough in the current environment for its taste.
Wall Street’s reaction was immediate, Taubman’s stock fell 20.1 percent to $36.17 — a steep discount to the $52.50 price on the deal, which had Simon buying 80 percent of The Taubman Realty Group. Taubman ended the day with a market capitalization of $2.2 billion. It was a bad day on both sides, with Simon’s stock also taking a hit, sliding 4 percent to $83.01, giving the company a market cap of $25.4 billion.
Simon said it had “exercised its contractual rights to terminate” the deal, arguing it could because COVID-19 had “had a uniquely material and disproportionate effect on Taubman” and that its long-sought quarry had “failed to take steps to mitigate the impact of the pandemic as others in the industry have, including by not making essential cuts in operating expenses and capital expenditures.”
To try to make that stick, Simon filed suit in Michigan state court requesting a declaration that “Taubman has suffered a Material Adverse Event under the merger agreement and has breached the covenants in the merger agreement governing the operation of Taubman’s business.”
The about-face is especially stark considering Simon made a big push to buy Taubman in 2002 and 2003 and was eventually rebuffed.
Taubman on Wednesday confirmed it had received “a notice purporting to terminate the previously announced agreement and plan of merger” and found it to be “invalid and without merit.”
“Simon continues to be bound to the transaction in all respects,” Taubman said, adding that it “intends to hold Simon to its obligations” and “to vigorously contest Simon’s purported termination and legal claims.”
That includes seeking to enforce its rights under the contract, including the right to monetary damages based on the deal price.
Taubman is going ahead with its shareholder meeting on June 25 to approve the deal.
Clearly the break-up — or the shotgun marriage, depending on how it all turns out — is turning ugly.
According to a redacted version of the complaint, Simon is arguing that Taubman has violated the agreement, caused “serious and irreparable damage to its business,” has primarily indoor malls that shoppers will avoid and relies on wealthy consumers who are now buying online and high-end stores that are “suffering heavily.”
“Taubman’s centers also feature a much higher percentage of high-end stores selling upscale products—such as Saks, Tiffany & Co., and now-bankrupt Neiman Marcus — compared with other retail real estate properties,” the suit said.
“To survive, Taubman now must spend significant amounts redeveloping its malls to secure new tenants to replace key anchors such as Neiman Marcus and J.C. Penney — which are both in bankruptcy — Sears, and other core tenants,” the suit said. “A recent Bank of America analysis isolated Taubman as the retail real estate investment trust most dependent on higher quality and specialty department stores, many of which are facing grave financial difficulty.”
Simon is a much larger player, with revenues of $5.8 billion last year versus Taubman’s sales of $661 million, but it too operates many A malls and is exposed to many of the same trends.
The suit also argues that Simon and other retail estate companies are doing more to adjust their businesses to adjust to COVID-19 realities.
“Simon reluctantly furloughed or terminated more than half of its employees,” the suit said. “Simon’s independent board directors suspended payment of their cash retainer fees. [Chief executive officer] David Simon deferred payment of the entirety of his 2019 cash bonus, waived his 2020 base salary, and deferred his 2020 Long-Term Incentive Plan equity award…. But Taubman has taken no comparable measures. It has not announced any headcount or employee salary reductions.”
All of that marks a big change in tone from an analyst call in February when the ceo’s — David Simon and Robert Taubman — laid out their deal for Wall Street.
“Both companies have great assets,” Taubman said then. “David and I have known each other forever and have been able to develop a terrific relationship in the last few years. I’m looking forward to working closely with him and the new board to execute on our portfolio’s next phase of development and growth.”
Simon, repeatedly referring to Taubman as “Bobby,” said at the time: “Clearly, there’s a lot of excitement at both our companies about the opportunities today’s announcement offers to stakeholders of both companies. And just to remind everybody, we are investing in premier assets at an attractive underwritten cap rate.”
Things have changed quickly — and for other players, too. Sycamore Partners sued to get out of its deal to buy control of Victoria’s Secret and got its wish when the retailer’s parent company, L Brands Inc., walked away. And LVMH Moët Hennessy Louis Vuitton has also had second thoughts about its $16.2 billion agreement to buy Tiffany & Co., although that deal is still pending.