Simon Property Group Inc. is unlikely to buy Capital Shopping Centres Group Plc because it will take too long for rents to rise enough to justify a price its U.K. counterpart would accept, according to Barclays Capital real estate analysts.
“The economics of an acquisition appear difficult to justify at levels that could get CSCG shareholders interested,” analysts Ross Smotrich and Aaron Guy said in a note to clients Tuesday.
Indianapolis-based Simon, the largest U.S. mall owner, made a conditional offer of 425 a pence share for Capital Shopping on Dec. 15, valuing the U.K. company at 2.9 billion pounds, or $4.6 billion. Simon attached several conditions to its proposal, including that Capital Shopping drop a planned cash-and-shares purchase of the Trafford Shopping Centre in Manchester that would give seller Peel Group a 25 percent stake in Capital Shopping.
“If the Trafford acquisition is completed, SPG would find itself at a material disadvantage to acquire CSCG in the medium term,” said Smotrich, who works in New York for the investment banking unit of Barclays Plc, and Guy, who is based in London. “Any future plan would become materially more expensive and complicated, leaving Simon with few options.”
Simon wants to acquire a portfolio of malls in the U.K. that couldn’t be replicated in a market where planning consents for new shopping centers are hard to obtain, the analysts said. Buying Capital Shopping also would give Simon’s tenants an opportunity to open stores outside the U.S., they said.
Another attraction of Capital Shopping for Simon, which already has a 5.1 percent stake in the company, is the potential for rent increases at its stores. Capital Shopping’s rents are 20 percent below the market average, according to the Barclays report.
“It will ultimately be challenging for SPG to underwrite a more aggressive firm bid given that much of the value will take years to realize,” the analysts said.
Simon’s tactics are “eerily similar” to its unsuccessful efforts to buy General Growth Properties Inc., Smotrich and Guy said. They include offering financing at better terms than a third party and making indicative offers through press releases.
Simon has until Jan. 12 to make a firm bid for Capital Shopping or abandon its pursuit, U.K. regulators said Dec. 17.
Capital Shopping, which delayed a shareholder vote on the Peel transaction to Jan. 26 from Monday, has refused to allow Simon access to its books, saying the offer “very substantially undervalues the company and its prospects.”