SPG Bids for Macerich in Major Growth Play

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Malls are dying throughout the country. This apparent reality has been a talking point in the real estate industry for more than a decade. The argument goes that the rise of online shopping and discount general merchandisers have helped to turn malls into barren retail wastelands.

simon_malls_185x185This is a half-truth. Malls anchored by historically solid middle-class retailers like the Sears and J.C. Penney’s of the world have suffered from the changing shopping landscape and a widening of the income gap.

However, what the industry calls “Class A malls” are generating record returns. These are malls with high-end stores that serve the top 20% of consumers in urban centers and affluent communities right outside of metropolitan areas.

This Class A market is what drives hostile takeover bids like Simon Property Group Inc (NYSE:SPG) acquiring one of its largest competitors, Macerich Co (NYSE:MAC).

The Shopping Mall REIT Sector May Get Even Smaller

Here’s the deal as reported by Forbes’ Erin Carlyle:

 

“Simon is proposing a bid of $91 per share in cash and Simon shares for Macerich, which values the company at $16 billion and represents a 30% premium to Macerich’s close price of $69.88 on November 18, 2014.  That was the day before Simon disclosed its 3.6% investment (5.71 million shares) in Macerich. The total value of the proposed transaction includes about $6.4 billion in debt outstanding, according to a statement released by Simon Monday. Macerich shareholders would get 50% cash, 50% Simon stock if the deal were to go through.”

So, what does it all mean? According to Rich Moore, managing director at RBC Capital Markets, “[This deal is] important because the regional mall space is the most consolidated of the real estate sectors already, and this would be further consolidation.”

That’s an understatement.

Presently there are eight regional shopping mall REITs that control nearly 60% of the Class A malls in this country. The SPG deal would bring that number to seven, and Simon Property Group would have eliminated one of its biggest competitors. In fact, it would be the merging of the No. 1 and No. 3 biggest shopping mall REITs as SPG attempts to keep its hold on top of the high-end mall sector.

This Will Not Be an Easy Process

One of the biggest holdups to this transaction will be that it’s a hostile takeover.  Macerich hasn’t been too receptive to multiple SPG overtures of getting a deal done. Apparently, Macerich has discussed with their advisers possible takeover defenses.

Robbie Wheelan wrote in The Wall Street Journal Tuesday:

“In Maryland, where Macerich and many other REITs are incorporated, state law affords them antitakeover protections that can slow down hostile suitors and limit their ability to accumulate shares without the consent of the target company’s board.”

And even if the Board does become interested in selling, the $91 bid will likely be considered a starting point.

After all is said and done, and if the deal does goes through, expect the transaction to garner the interest of the Federal Trade Commission (FTC). Retailers are watching these proceedings with a wary eye as a merger of the No. 1 and No. 3 shopping mall REITs would seriously threaten their ability to negotiate leases with SPG. They’re almost certain to approach the FTC and ask for anti-trust protection.

In a proactive move to curb monopoly misgivings, SPG has acknowledged that they would not keep all of the Macerich portfolio. They would sell certain assets to General Growth Properties (NYSE:GGP) — the number 2 American mall owner.

As you can see, there are a lot of moving parts to this deal. But, the important message behind the proposed deal is SPG’s belief in this sector’s opportunities.

Simon Property Group Stills Sees Growth in Class A Malls

Adding the Macerich’s portfolio to SPG make the company bigger, yes, but it would also expand its presence in Arizona and Southern California — two areas where Macerich has a large concentration of properties.

As D. J. Busch, a senior analyst with Green Street Advisors, pointed out:

“Simon’s appetite for more Class A malls speaks volumes to the asset class … Simon’s menu of options to allocate its capital are vast. They have opportunities in Europe and Asia. For them to put their weight behind A malls in the U.S. is an indication of where they believe the growth is.”

This is a deal to keep an eye on, because if everything works as SPG intends, the REIT will be better positioned to further dominate a market that continues to be extremely profitable.

As of this writing, Jason Jenkins did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/spg-bid-for-macerich-seen-as-a-growth-opportunity-reit-simon-property-group/.

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