Simon's High-Premium Buyout of Taubman May Not Be as Pricey as It Looks

Taubman Centers Inc. (NYSE: TCO) saw its shares surge higher on Monday on news that Simon Property Group Inc. (NYSE: SPG) was acquiring the company in a deal valued at $3.6 billion. The move aims to combine the two mall operations into a single company. While Taubman shares had rallied on reports of deal talks last week, the 50% gain on Monday actually would translate to a gain of about 100% from Taubman’s lows at the start of the year. Even if this stock is down from $80 in 2016, some investors are going to question whether this is just too much of a premium to chase would-be deal synergies this late in the economic business cycle.

According to the news announcement, Simon Property will acquire all Taubman common stock held by the public for $52.50 per share in cash. The Taubman family in control of the acquisition target will sell approximately one-third of their collective ownership interest at the transaction price but will remain a 20% partner in Taubman Realty Group Limited Partnership.

A 50% premium, even after the deal news caused a gain in prior days, seems excessive on the surface. That said, Taubman Realty Group has control of 26 super-regional shopping centers in the United States and Asia. Of those, 24 are deemed to be high-quality retail assets, with 21 mall locations in the United States and three in Asia. The new buyout price is also more than $15 per share higher than last week’s consensus target price from Refinitiv.

With Taubman shares up at $53.10, some investors may be hoping for a higher buyout price. This stock had been in decline since 2017, if not sooner, based on a peak above $80 in 2016. The stock started out 2020 basically at $26.50. Even now, its dividend yield would screen at over 5.1% at the $52.50 share buyout price.

It seems that Simon Property may not care about the premium as much as it does fortifying the land grab here. Simon has a $43 billion valuation, so even if it gets determined that the group overpaid, its management can simply say the need to grab the assets at a sale price was more important than worrying about small change here. After all, this is not even 10% of the size of Simon Property, and Simon Property itself is way down from its highs due to the ongoing, and perhaps growing, concerns about foot traffic in mall settings.

As for the premium and acquisition, one helping hand here is that Simon Property appears to not have to plow endless investment dollars back into the Taubman properties it is acquiring within the deal.

Taubman’s own team did note a number of redevelopment opportunities within the portfolio of properties, and that is becoming a norm now as mall operators are having to look for new types of tenants outside of just chain retailers and department stores. Perhaps the biggest question ahead is what will happen with the combined dividend.

At $141.50 per share, Simon’s $8.40 dividend per share generates nearly a 6% yield. This stock’s 52-week range of $130.01 to $186.40 shows how much the drop has been for mall-based retail owners. Back in 2016, this was a $225 stock.

Wall Street has not been as happy with the big mall-based settings as it had been in decades past. This past decade was the period in which the Amazon and online assault on physical retailers really proved to be a wipeout for many old-line retailers. As mobile becomes an ever better experience, that trends likely will remain more of the same rather than abating, and malls and retailers haven’t even had to endure a recession or major economic slowdown since the Great Recession.

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