People sit at tables at the Stanford Shopping Center, a Simon Property Group property in Palo Alto, Calif., . Simon Property Group, the nation's largest shopping mall owner, made a $10 billion hostile bid Tuesday to acquire ailing rival General Growth PropertiesSimon Properties General Growth, Palo Alto, USA

Nearly two decades after its first hostile takeover attempt of Taubman Centers Inc., Simon Property Group has bagged its quarry.

The largest Real Estate Investment Trust in the U.S. on Monday said it has entered into a definitive agreement to acquire 80 percent of Taubman Realty Group Ltd. Partnership for $3.6 billion in cash.

According to the terms of the agreement, Simon through its operating partnership Simon Property Group LP will acquire all Taubman common stock for $52.50 a share in cash, and the Taubman family will sell about one-third of its ownership interest at the transaction price and remain a 20 percent partner, with the purchase price representing a 6.2 percent underwritten capitalization rate.

Wall Street, seeing an opportunity for growth at a time when the shopping center and retail industries are both deeply challenged, applauded the prospect of a Simon-Taubman combination, with Simon shares rising $1.76, or 1.25 percent, to $142.78, and Taubman shares gaining $18.34, or 55.22 percent, to $53.12 on the New York Stock Exchange.

Taubman’s soaring share price is a reflection of the market’s belief that “Simon will create value. Simon is a very good operator,” said Craig R. Johnson, president of Customer Growth Partners, adding that of the terms, “It’s a little rich, but I think Simon will create some value and the sector has needed some consolidation.”

Taubman has more uniformly upscale properties, while Simon operates malls, Mills and Premium Outlets and has owned or had interest in locations in North America, Asia and Europe.

“We’re guessing Simon will unload some of the weaker Taubman malls,” said Johnson. “However, Simon has some weak malls, too. They’re not all A or A+ centers like King of Prussia, in King of Prussia, Pa. Taubman’s portfolio is filled with centers such as The Mall at Short Hills in Short Hills, N.J.”

As far as competencies, Johnson said, “Taubman doesn’t have much skill with mixed-use redevelopment. There’s too much retail square footage. If you have a valuable piece of property, [a mall] is not the highest and best use. Gap is trimming down its store count, and Victoria’s Secret is closing stores.”

Simon is in the process of transforming Burlington Mall in Burlington, Mass. into a mixed-use property. “Burlington was A-, and it will be turned it into an A+. It’s right off I-95. There’s medical, commercial and office, but it’s a little thin on residential. Simon is doing the same thing at Sawgrass Mills in Sunrise, Fla.,” he said.

Johnson believes that Simon will unload B and B+ malls in its portfolio. “They don’t have too many,” he said, adding, “Nobody’s perfect. Taubman has been trying to unload its center in Stamford, Conn.”

Chairman and chief executive officer David Simon has for years complained loudly about the fact that he feels shares in REITs have been unfairly devalued by Wall Street. His arguments in support of the deal include:

• Paying a 6.2 percent cap rate, which will be at least 3 percent accretive to funds from operations.

• Enhancing the growth prospects of the Taubman assets.

• Among the most productive shopping centers in the U.S., Taubman’s shopping centers post comp sales of $972  per square foot, and the portfolio has a 94 percent occupancy rate. Simon’s comp sales per square foot are $693.

• Following the closing of the deal, Simon will have a manageable leverage ratio of 6.1-times net debt/net operating income, allowing it to make future acquisitions.

The new entity will be run as a joint venture and headquartered in Bloomfield, Mich., where Taubman is based. Asked by an analyst why Simon didn’t use equity for the acquisition, David Simon said, “If you look at a multiple of earnings, EBITDA, NAV, any metric you want, we are undervalued. I have no desire to issue stock at this time. At the same time, our balance sheet is very strong. We think we’ll accomplish the goals we need to with redeveloping the Taubman assets and the Simon Property assets.

Monday’s news is a stunning turn of events considering that Taubman fought vigorously to remain independent in the past, and managed to keep Simon at bay, in spite of the latter’s well-financed campaign. On a conference call Monday, ceo Robert S. Taubman said, “Obviously, we are very familiar with each other’s portfolios. Both companies have great assets. 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 Property tried to purchase Taubman Centers Inc., in November 2002 for $17.50 a share in a hostile takeover. The following month, Taubman’s board unanimously rejected Simon’s sweetened offer of $18 a share, or $1.5 billion. Simon has also launched an unwanted takeover of another REIT, Macerich Co., which was also declined.

Simon called in firepower in January 2003 from Westfield America, now Unibail-Rodamco-Westfield, in a $20-a-share revised bid for Taubman, upping its valuation to $1.7 billion from $1.5 billion. The revised offer represented a 50 percent premium to Taubman’s price when Simon proposed $17.50 a share, and a 25 percent premium to the smaller mall owner, developer and operator’s closing price at the time.

Both Simon and Taubman have exposure in Asia, but Taubman, which was early to establish a presence there, completed the sale of its 50 percent interest in CityOn.Zhengzhou in Zhengzhou, China, to the Blackstone Group, for $89 million, and expects in the first quarter to complete the sale of its 50 percent interest in CityOn.Xi’an, in Xi’an for $91 million.

“Taubman is in Asia and Simon has a lot of outlet centers in Japan,” Johnson said. “Simon is a much bigger company. Taubman’s bet on Asia and China is proportionally a little bigger than Simon’s bet on Asia and China.

“Now, with the coronavirus, nobody knows,” said Johnson, referring to the deadly virus outbreak with Wuhan, China as its epicenter. “I don’t know if it will get better sooner rather than later. If it turns out to take months rather than weeks to get better, we’re going to have an additional factor [relating to shopping centers]. One reason malls are becoming less relevant is, why would you want to go to a mall when you could have a delivery man bring you your products and take the risk.”

News of the latest potential deal emerged last week during Simon Property’s fourth-quarter earnings conference call when Simon was asked a question by a Wall Street analyst.

“Hey, David, earlier in the call you talked about buying real estate, and that brick-and-mortar obviously still has a great future. You said you’re not going to deviate from that, and when buying makes sense, you would do it,” said Citigroup senior REIT analyst Michael Bilerman, paraphrasing a comment made by the ceo. “There was a headline that came across on Bloomberg during the call that you potentially had merger talks with Taubman and that [the talks] eventually broke off given the market volatility.”

Taubman and Simon have been reeling from massive changes in consumer shopping behavior that have prompted the bankruptcies of thousands of retailers since the 2007 recession, the rise of online shopping and generational preferences of Gen Z. While mall owners and operators hoped the situation would change, it’s become apparent that this is the new order and consumers aren’t going back to their old ways.

Simon owns or has an interest in 233 locations in North America, Asia and Europe. Simon Property has the muscle and financial wherewithal to invest in shopping centers, and has been diversifying its portfolio with partnerships, such as a recently revealed hookup for coworking space. Taubman has the fashion imprint.

Simon Property’s net income fell 13 percent from a year earlier to $2.1 billion in 2019, according to its fourth-quarter report Tuesday. Revenue rose 3.5 percent to $5.8 billion in the same time period.

Taubman Centers, based in Bloomfield Hills, Mich., operates 26 regional and outlet shopping centers in the U.S. and Asia. The company on Feb. 12 is scheduled to report earnings.

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