By Robbie Whelan
Simon Property Group Inc., the largest mall owner in the U.S.,
launched a $16 billion unsolicited bid for one of its biggest
rivals, Macerich Co., as it seeks to gain scale amid an oversupply
of retail space and changing habits of U.S. shoppers.
The retail landscape in the U.S. has been dividing into two
distinct sectors, with upscale malls prospering and
down-in-the-heels malls struggling to survive. A raft of deals in
recent years has left the highest-quality malls concentrated in the
hands of a few owners, typically real-estate investment trusts like
Simon and Macerich, the third-largest mall owner in the U.S.
Simon is offering $91 a share in cash and stock for Macerich in
a takeover move that would give the combined company more clout in
negotiating leases with store owners, and give Simon a bigger
presence in Arizona and Southern California, where Macerich has a
large concentration of properties.
Macerich owns 59 shopping centers, including the Biltmore
Fashion Park in Phoenix and Tysons Corner Center outside of
Washington, two of the types of highly profitable centers that
Simon covets. Simon owns 190 properties, including Roosevelt Field
mall on Long Island and Houston Galleria, two of the
highest-selling malls in the country.
So far, Simon has gotten a chilly reception from Macerich,
according to people familiar with the matter. On Monday Macerich
said it had received Simon's proposal and would review it with its
advisers.
After decades of aggressive building, mall construction has
petered out. Developers built an average of 193 malls per decade
from the 1960s through the first decade of the 2000s, according to
real-estate data firm CoStar Group Inc. Since the beginning of
2010, just nine malls have been built, and only two are currently
under construction.
"We're oversaturated," said Daniel Busch, an analyst with Green
Street Advisors, a Newport Beach, Calif., research firm.
"Development is off the table. More malls are going to close than
open in the mall space over the next 10 years, for sure."
For the surviving malls, however, consolidation has been a boon,
even as e-commerce erodes overall mall traffic. Base rents at
regional malls increased by 17.4% in 2014, according to the
International Council of Shopping Centers, a trade group. That
helped mall REITs produce a total return of 32.6%, including
dividends, last year, according to the National Association of Real
Estate Investment Trusts, their best year since 2009.
Green Street expects about 15% of the nation's roughly 1,100
shopping centers to close or be repurposed over the next two
decades.
Simon has reduced its exposure to less-tony malls. Early last
year, Simon spun off a portfolio of strip centers and smaller malls
into a new company called Washington Prime Group Inc. In September,
Washington Prime paid $4.3 billion in cash and stock, including the
assumption of debt, for Glimcher Realty Trust Inc., another mall
REIT.
The Macerich offer is Simon's largest and boldest takeover
campaign yet. The total price tag, including the assumption of
debt, is $22.4 billion. Simon said it would sell certain Macerich
malls to General Growth Properties Inc., the nation's
second-largest mall owner, in what market-watchers see as a way of
allaying antitrust concerns.
Simon's offer price represents a 30% premium over Macerich's
share price on Nov. 18, the day before Simon disclosed it had taken
a 3.6% stake in the company, which investors interpreted as the
first step in a takeover effort. Simon had disclosed its 3.6% stake
right after Macerich had used its stock to buy out joint ventures
it owned with the Ontario Teachers' Pension Plan, making the
Canadian retirement fund its second-largest shareholder with nearly
11% of its shares.
On Monday, Macerich shares rose 7% to $92.76, past the offer
price, signaling that Wall Street expects a higher bid.
In a letter to Macerich's CEO and chairman Arthur Coppola on
Monday David Simon, the chairman and chief executive of Simon
Property, said he was disappointed the Santa Monica, Calif.,
company hadn't responded to earlier overtures.
"This transaction has strong strategic logic and would bring
substantial value to our respective shareholders," Mr. Simon
wrote.
On Dec. 9, Mr. Coppola attended a dinner with investors and
analysts at the Four Seasons restaurant in Manhattan. Also present
was Richard Sokolov, Simon's president and chief operating officer.
People who were at the dinner described the atmosphere between the
two men as awkward.
Mr. Simon has a history of pursuing deals aggressively. In 2007,
his company teamed up with hedge fund Farallon Capital Management
LLC to buy Mills Corp., another mall REIT, for $7.9 billion,
including the assumption of debt. In 2012, Mr. Simon expanded to
Europe, taking a hefty stake in French retail landlord Klepierre
SA. Last year, Klepierre bought Dutch rival Corio NV for $9.7
billion.
In the U.S., however, some of Mr. Simon's biggest campaigns have
been thwarted. A decade ago, Simon made a $1.68 billion hostile bid
for rival Taubman Centers Inc., and starting in 2009 Simon made at
least four buyout bids for General Growth. Simon ultimately dropped
both bids after they were complicated by legal issues.
If Macerich rejects the bid, Simon could choose to mount a proxy
battle to install representatives on the Macerich board and ratchet
up public pressure. REITs are difficult hostile-takeover targets,
however, thanks in part to state laws that protect them from
unsolicited bids.
In Maryland, where Macerich is incorporated, REITs can stagger
their boards in the middle of a fight without shareholder approval.
Doing so would mean only a minority of Macerich's 12 directors
would be up for re-election this spring, robbing Simon of the
opportunity to gain control in a proxy fight.
Macerich is considering staggering its board, according to a
person familiar with the matter. The company has also hired
Innisfree M&A Inc., a proxy-solicitation firm known for helping
wage and defend against hostile bids, this person said.
Macerich's investment bankers include Deutsche Bank AG, Goldman
Sachs Group Inc. and J.P. Morgan Chase & Co. Simon is
represented in the proposed transaction by Bank of America
Corp.
Liz Hoffman contributed to this article.
Write to Robbie Whelan at robbie.whelan@wsj.com
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