UPDATE: Taubman says it will fight Simon’s effort to terminate the deal
The coronavirus may take a new victim: the $3.6-billion acquisition deal involving Bloomfield Hills-based mall owner and developer Taubman Centers.
Indianapolis-based Simon Property Group, the largest mall operator in the U.S., announced Wednesday morning that it is terminating its purchase agreement for Taubman Centers, including for Taubman’s remaining two Michigan malls: Great Lakes Crossing Outlets in Auburn Hills and Twelve Oaks Mall in Novi.
The agreement dates to Feb. 9, weeks before the coronavirus pandemic brought the closure of malls, retail stores and shopping centers across the country. The deal, which would have ended Taubman family control of the company, had yet to close.
Simon said the pandemic has put tremendous financial strain on Taubman and that “extreme actions” may be necessary to “rescue” the company.
In response, Taubman said it will fight Simon’s attempt to terminate the sale and insisted that Simon remains legally bound to finish the deal. Taubman said it has called a special June 25 meeting of its own shareholders to approve the deal.
“Taubman intends to hold Simon to its obligations under the (deal)and the agreed transaction, and to vigorously contest Simon’s purported termination and legal claims,” the company said in a news release.
Simon announced that it is terminating the deal for two chief reasons.
“First, the COVID-19 pandemic has had a uniquely material and disproportionate effect on Taubman compared with other participants in the retail real estate industry,” the statement said.
“Second, in the wake of the pandemic, Taubman has breached its obligations, which are conditions to closing, relating to the operation of its business,” the statement said. “In particular, 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.”
More: Twelve Oaks, Great Lakes Crossing malls bought in $3.6B deal
More: Michigan malls start to set reopening dates: Where you’ll be able to shop
Simon said the purchase agreement specifically gave it the right to terminate the deal if a pandemic disproportionately hurt Taubman’s business. That scenario ended up occurring, according to Simon, because Taubman has many enclosed malls in major metropolitan areas, and some of them depend on domestic and international tourism.
Taubman’s malls also are typically aimed at high-end shopping, which has been hard hit by the pandemic.
In the legal realm, Taubman may have the upper hand in its fight to save the deal.
“Taubman has a good chance of winning in court if it decides to fight instead of giving Simon what it might really be after — a lower price,” said professor Erik Gordon of the University of Michigan’s Ross School of Business. “Companies usually lose claims that they can back out of a deal because of a material adverse change that affected the target company differently than it affected other similar companies.”
Details emerge in court filings
Simon said it took legal action Wednesday in Oakland County Circuit Court that seeks a declaration that Taubman suffered a “material adverse event” and breached covenants in the deal.
Under the deal, the Taubman family was to sell one-third of their stake and continue to own 20% of Taubman Realty Group LP and Taubman Chairman and CEO Robert S. Taubman was to keep his management positions.
In the legal filing, Simon claims that many financial analysts anticipate that Taubman’s indoor malls will be “the last types of retail real estate properties that most consumers will want to visit” even after the pandemic recedes.
Simon also says that wealthier shoppers will be more likely to shop online and not inside stores after the pandemic, which will hurt Taubman’s many upscale malls and hurt their ability to charge premium rents.
Simon’s legal filing also claims that Taubman is facing “severe financial problems” and is too short on cash to successfully repurpose mall space that could empty as more retailers struggle to survive after the pandemic, which has already led to bankruptcies by Neiman Marcus, JC Penney and J. Crew.
The filing claims Taubman failed to significantly cut expenses, do layoffs or cut executive salaries when the pandemic hit and therefore “has been financially devastated.”
The publicly available version of Simon’s filing redacts what appears to be Taubman’s latest financial results, which Simon says are “far worse than the experience of (Taubman’s) competitors.”
Taubman drew down $350 million on its primary $1.1 billion credit line at the end of March, nearly the entire amount available, the filing says.
“As a result of Taubman’s failure to operate in the ordinary course, even more extreme actions will be necessary in the future in an attempt to rescue its business,” the filing says. “Far from preserving jobs or helping its employees, Taubman’s actions will ultimately jeopardize more jobs, harm its employees, and damage the company, even as Taubman’s executives maintain their lucrative compensation.”
26 malls in portfolio
Taubman Centers owns or manages 26 malls or large shopping centers in the U.S. and Asia. It previously owned The Mall at Partridge Creek in Clinton Township and Fairlane Town Center in Dearborn, although sold them in 2014, along with four other malls in other states to Starwood Capital Group.
The company was founded in the early 1950s by A. Alfred Taubman, who died in 2015 at age 91.
The Simon Property Group has a larger portfolio of malls and shopping centers, including Birch Run Premium Outlets and Briarwood Mall in Ann Arbor.
Under the deal, Simon had agreed to acquire Taubman’s stock for $52.50 a share, or a 51% premium to what Taubman shares closed the previous trading day and a 98% premium to what the shares closed on Jan. 31, the last trading day before market rumors about the deal, according to Simon’s legal filing.
Taubman stock was down 18% to $37.25 as of 1:45 p.m. Wednesday.
Contact JC Reindlat 313-222-6631 or [email protected]. Follow him on Twitter@jcreindl. Read more on business and sign up for our business newsletter.
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