No matter how attractive the price tag on Taubman Centers Inc. seemed in February when rival Simon Property Group Inc. said it would acquire the company, that value appears inflated in the post-coronavirus retail environment.
Simon on June 10 filed a complaint in the Circuit Court for the 6th Judicial Circuit of Oakland County, Mich., terminating the planned transaction on the grounds that Taubman had suffered a material adverse event with the coronavirus and breached the deal's covenants by failing to react appropriately to support its operations. In a response, Taubman maintained that Simon's termination is "invalid and without merit" and that it is still bound to the terms of the original contract.
"We are getting questions on this being an opening salvo in an attempted price reduction, or an official end to an unlikely marriage," BMO Capital Markets analyst Jeremy Metz wrote in a research note, framing the turn of events as a "very cautionary statement" about the current retail environment.
"The action obviously suggests to us a severe breakdown in re-pricing talks."
Analysts and other observers who had applauded Simon for securing a $3.6 billion cash deal for Taubman, valuing its class A mall real estate investment trust peer at about $52.50 per share, when the transaction was announced on Feb. 10, said this week that the pricing could be materially reduced in a renegotiated transaction. Citing conversations with investors, they said Taubman shares would trade far lower if its merger with Simon fell through — a distinct possibility now that the two parties are headed to court. They noted that a Michigan court may favor Taubman, which is headquartered in the state.
As of midday June 12, Taubman shares were trading around $36.00 per share, with the market pricing in a roughly 50% probability of close, according to Haendel St. Juste, an analyst at Mizuho Securities, who said the court battle could last months. He expects little comment from Simon or Taubman before the parties appear in court.
"Until then, the saga likely keeps both stocks range-bound and makes them more challenging to invest in from a fundamental perspective (along with rent collection, dividend and store closing uncertainty)," St. Juste wrote in a research note.
Investors think Taubman could trade down to $15.00 to $20.00 per share if the planned combination is ultimately abandoned, according to Compass Point analyst Floris van Dijkum. But he said Taubman shares could fall as low as $8.50 if the company traded at the same 8.5% implied cap rate as Simon and another peer, Macerich Co., are now trading.
However, van Dijkum posited that both parties likely will come around to an agreement and proceed with a transaction in some form. Alternatives to a completed deal "appear dire," he wrote in a note. "We continue to believe that both companies will come to their senses and agree to a price between $36 to $42 per share which would allow both sets of shareholders to claim victory."
Jefferies analysts Linda Tsai and Jonathan Petersen framed the public exchange between the two parties this week as an airing of grievances. The pair estimated Taubman is worth about $26.00 per share, or an approximate 7.9% cap rate, without the merger, but they maintained that the deal is not dead.
"In a post-COVID retail operating environment, [Taubman's] stock, in our view, already prices in a deal cut," the analysts wrote in a note. "It appears new deal terms could not be agreed upon privately, and will therefore be negotiated publicly and potentially be more costly."