UPDATE: June 10, 2020: Taubman on Wednesday confirmed that it received Simon Property Group's notice, but called it "invalid and without merit," and said Simon remains "bound to the transaction in all respects." Taubman also said it will "vigorously contest Simon's purported termination and legal claims," and "pursue its remedies to enforce its contractual rights under the Merger Agreement, including, among other things, the right to specific performance and the right to monetary damages, including damages based on the deal price." The mall developer said the special shareholders meeting to vote on the original proposal is still on for June 25, according to a press release emailed to Retail Dive.
Simon Property Group, Inc. on Wednesday said it terminated its Feb. 9 agreement to merge with rival mall developer Taubman Centers Inc. The deal for Simon to acquire an 80% ownership interest in The Taubman Realty Group Limited Partnership, including all of Taubman common stock, for about $3.6 billion, was originally expected to close about now.
Instead, Simon has filed a lawsuit in a Michigan Circuit Court arguing that Taubman breached covenants regarding the operation of its business, specifically that "Taubman has failed to take steps to mitigate the impact of the pandemic as others in the industry have, including by not making essential cuts in operating expenses and capital expenditures."
Their agreement also "specifically gave Simon the right to terminate the transaction in the event that a pandemic disproportionately hurt Taubman," according to Simon's press release. Taubman didn't immediately return Retail Dive's request for comment.
The pandemic has provided a reason to walk back plans that seemed forged in ink a few months ago.
Private equity firm Sycamore Partners, for example, last month made a similar move to back out of its agreement, also from February, to acquire a majority stake in Victoria's Secret. But the maneuver was never tested in court, as brand parent L Brands, after initially filing a countersuit, fairly quickly agreed to drop the matter. Both parties walked away without either paying any sum.
When it comes to Wednesday's play, the strength of either side's arguments will rest mostly in the details of their agreement. Simon's contention that Taubman failed to take steps to protect itself from the pandemic's impacts ignores that Taubman cut $10 million in operating costs and deferred at least $100 million in capital expenditures, according to a note from Wells Fargo Senior Analyst Tamara Fique. That could reflect details that Simon is privy to because of their negotiations or Simon may be comparing Taubman's actions to the real estate industry beyond malls, she said.
Simon in its release also describes as a vulnerability Taubman's "significant proportion of enclosed retail properties located in densely populated major metropolitan areas, dependence on both domestic and international tourism at many of its properties, and its focus on high-end shopping."
But, in casting doubt on the potential success of Simon's move, Fique in emailed comments noted, "These are likely the very same factors that attracted Simon to Taubman at the outset."
While Simon may very well have soured on the notion of taking on these malls, the developer may also have an ulterior motive, according to Nick Egelanian, president of retail real estate firm SiteWorks.
"It is easy to see why Simon would want to get out of this deal — it is even more understandable to see why Simon would want nothing more than to renegotiate the price, which may well be its ultimate objective of making this move," he told Retail Dive in an email. "Simon still wants the malls, I suspect, but the price is just too high. I believe that Simon will end up with the Taubman portfolio one way or other in the end, but most likely at a greatly reduced price."