Simon Property Drops Capital Offer - Analyst Blog

Simon Property Group Inc. (SPG), a leading real estate investment trust (REIT), has reportedly discarded its plans to acquire Capital Shopping Centers Group Plc (CSCG.L), the largest shopping center operator in the U.K. Simon Property initially made a $3.6 billion acquisition offer for Capital Shopping, when the latter announced an agreement to buy the Trafford Centre shopping mall near Manchester in northwest England for $1.2 billion in shares and bonds and assumption of approximately $1.4 billion of debt.

When Capital Shopping snubbed its initial offer, Simon Property increased its conditional bid to $4.5 billion or 425 pence per share. However, Capital Shopping repeatedly rejected Simon Property's overtures and instead remained adamant that it was worth over 625 pence per share. Eventually, Simon Property was forced to abandon its acquisition bid as Capital Shopping refused to share any due diligence information.

Simon Property presently holds a 5.6% ownership interest in Capital Shopping, which owns 4 of the 10 biggest malls in the U.K. Simon Property was mulling to gain a strategic foothold in the U.K. through the acquisition of a leading domestic shopping center owner. If Simon Property was successful in its takeover bid, it would have emerged as a retail real estate behemoth in the U.K.

The latest futile acquisition bid is the second such instance in the past year. Simon Property had earlier made an unsolicited $10 billion takeover bid in 2010 for its bankrupt rival General Growth Properties Inc. (GGP). General Growth was arguably the second largest mall operator in the U.S. and owned over 200 malls in 45 states. In April 2009, General Growth filed for Chapter 11 bankruptcy protection primarily due to debt troubles arising after the acquisition of the Rouse Company for $12.6 billion in 2004.

General Growth favored a rival proposal to preserve its independence and proceeded with that deal to emerge from the largest U.S. real estate bankruptcy proceedings in November 2010. Post-bankruptcy, General Growth has restructured its holdings into two groups, the namesake and The Howard Hughes Corporation (HHC). The refurbished General Growth continues to be the second-largest shopping mall owner and operator in the U.S., with more than 183 regional malls in 43 states. The spin-off company comprises master planned communities and other strategic real estate development opportunities of the erstwhile entity.

Simon Property is the largest publicly traded retail real estate company in North America with assets in almost all retail distribution channels. The company generally enters into long-term leases with its tenants, which insulate it from short-term market swings that have weighed on other players in the industry. Furthermore, the company's international presence gives it a more sustainable long-term growth story than its domestically focused peers. The geographic and product diversity of the company safeguards it from market volatility and provides a steady source of income.

We maintain our ‘Neutral' rating on Simon Property, which presently has a Zacks #2 Rank translating into a short-term ‘Buy' rating and indicates that the stock is expected to outperform the overall U.S. equity market for the next 1–3 months.

 
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