Notes from the Desk: Taubman Centers/Simon Property Group

Simon Property Group and Taubman Centers are both mall-focused REITs operating in the US. In February 2020, shortly before markets peaked, Simon arrived at a definitive agreement to acquire Taubman in an all-cash deal worth $3.2 billion. The $52.50 per-share deal value represented more than a 50% premium over where Taubman shares traded the day before announcement. As the novel coronavirus spread, mall properties across the US were temporarily shuttered due to quarantines and shelter-in-place orders. We have been following this deal very closely and we are well aware of the investors and commentators that have voiced fears that Simon was exhibiting signs of buyer’s remorse and might attempt to abandon the deal. Over the past several months we have maintained our exposure to the deal as we believe the definitive merger agreement in this transaction is one of the strongest contracts in our space today, and we believe Simon has very few – if any – avenues to escape its obligation to complete the merger.

On June 10, Simon filed to terminate the transaction, claiming Taubman has been disproportionately impacted by the pandemic and has breached its obligations under the merger agreement. The termination was not mutually agreed upon, and in fact Taubman publicly responded the same day, claiming Simon’s termination is invalid and without merit, and the company believes Simon continues to be bound to the transaction in all respects. Our conviction in our position has not wavered, as we believe Taubman by far has the stronger case for several reasons. The merger agreement, which has been described as “iron clad” in media reports, carves out pandemics as reasons by which a material adverse change (MAC) may be claimed. Furthermore, Taubman’s obligations under the agreement only call for the company to exercise “commercially reasonable” efforts in conducting its ordinary course of business. There are no financing contingencies on this deal, and it is being funded solely from Simon’s balance sheet. We have reviewed Simon’s court filing, which we believe makes what are at best dubious claims to support the company’s argument for termination (even more so as malls reopen and foot traffic resumes). Lastly, the case was filed in Michigan, where Taubman is both domiciled and headquartered. In our experience through similar court cases and appraisal rights processes, a “home court” advantage in such proceedings is very much a real thing. If this case goes to trial, we are highly confident that Taubman can emerge victorious and require Simon to complete the deal on its original terms.

That said, we are skeptical Simon’s endgame is truly to terminate the deal. Simon knows how strong the merger agreement is. Not only that, Taubman is a highly strategic asset for Simon. Taubman’s properties are typically higher end, Class A malls with upscale tenants. In a world where brick-and-mortar retail has been faltering – even before the pandemic – these are the stores and properties that are more likely to survive and retain greater value in the long term. Conversely, Simon has many Class B, C, and D properties in its existing portfolio. We believe Simon is highly incentivized to own Taubman, and this lawsuit may simply be posturing in an attempt to secure a price cut. Taubman’s shareholder vote is scheduled for just two weeks from now, and Simon was quickly running out of time before the deal would have closed on its negotiated terms. While we believe this deal will ultimately get done in one form or another, we do expect volatility in the spread to be prevalent. With that in mind, we intend to maintain our core position, and we will likely trade the spread opportunistically as it widens and tightens.

While the spread on the Taubman/Simon deal was sent significantly wider on the day’s news, it was not the only merger arbitrage situation that was impacted. Arbitrageurs exited positions in other transactions showing signs of buyer’s remorse, sending those spreads wider as well. Most notably, this included the acquisition of Tiffany & Co by Moët Hennessy Louis Vuitton SE (LVMH). Last week reports emerged in the press that LVMH was looking to find a way to renegotiate terms. While we don’t believe LVMH is wavering in its desire to own Tiffany, we do believe the company regrets having to sweeten its bid in order to convince Tiffany to come to the table shortly before the pandemic, which will clearly impact Tiffany’s business in the near term. Nonetheless, Tiffany is a one-of-a-kind asset that is highly strategic to LVMH, and its value is not found solely over the next two to three years, but the next two to three decades. Even if LVMH decides to try its hand in court in an attempt to convince Tiffany to agree to a price cut, this is another transaction with a strong merger agreement and we have a high level of conviction it will achieve a successful conclusion.

If we can leave you with one key takeaway, it is to never forget a definitive merger agreement is a binding contract. With few exceptions (such as a MAC, a regulatory block, or failure to secure a shareholder vote or financing), the parties to the deal must see it through to completion. We have nearly two decades of experience dissecting merger agreements – looking for loopholes, the avenues for escape – and we have seen when companies try to get creative in abandoning a deal or securing a price cut, when they succeed, and when they fail. Ultimately, when uncertainty and fear emerge and spread volatility spikes, our breadth of experience is what gives us the ability to maintain our conviction and see opportunity rather than misfortune.

Material represents the manager’s opinions and should not be regarded as investment advice or a recommendation of any security or strategy. Investors should not rely on these opinions in making their investment decisions. Our views are a reflection of our best judgment at the time of the commentary and are subject to change at any time based on market and other conditions, and we have no obligation to update them. Investing involves risk, including loss of principal. Past performance is not indicative of future results. View top ten holdings. Visit the glossary for definitions of terms.