Simon Property Group Inc., the biggest mall owner in the United States, will become the largest shareholder of European shopping center operator Klepierre SA and buy stakes in 26 U.S. malls in deals with a combined value of $3.5 billion.
Simon agreed to buy 28.7 percent of Klepierre from BNP Paribas SA for $37.04 per share in a deal valued at about $2 billion, the Indianapolis-based company said in a statement early Thursday morning. That’s about 20 percent more than Paris-based Klepierre’s closing share price Wednesday.
“European property companies remain undervalued,” Harm Meijer, an analyst at JPMorgan Chase & Co., said in a note to investors. “M&A is needed to close this valuation gap.”
Simon has scaled back its European presence by selling stakes in ventures in France, Italy and Poland and said Thursday it doesn’t currently plan to buy any more Klepierre shares. The company abandoned a bid for Capital Shopping Centres Group Plc in January 2011 after the United Kingdom’s largest publicly traded mall owner resisted the approach.
Simon was “exiting Europe just to get back in a bigger way,” said Craig Guttenplan, an analyst at CreditSights Inc. in London. “This seems to be a longer-term investment platform for the future.”
The company sold its previous European investments because they weren’t in a core market or didn’t have the right property mix, according to Rich Moore, an analyst with RBC Capital Markets in Solon, Ohio.
“It’s a very big move,” Moore said. “It tells you Simon’s next big moves are really international.”
Simon said in a separate statement that it would issue 7 million shares of common stock and three new series of senior unsecured notes with an aggregate principle amount of $1.5 billion to help fund the two deals.
Klepierre, Europe’s second-largest publicly traded mall operator, gained as much as 7.5 percent in Paris stock trading, the most since Nov. 28. The company has a market value of about $6.2 billion. BNP Paribas stock rose as much as 4.8 percent.
Klepierre’s portfolio—what Simon called “a collection of unique retail assets in strong markets”—was valued at about $21 billion at the end of 2011. Half of its properties are in France and Belgium, a quarter in Scandinavia and the rest in central and southern Europe.
The price of the stake doesn’t reflect Klepierre’s fair value, according to Jean-Yves Devloo, an analyst at ING Groep NV who has a “buy” rating on the stock.
The transaction values Klepierre at about $6.9 billion, or 6 times earnings before interest, taxes, depreciation and amortization, though excluding the dividends Simon will get as part of the deal. That compares with an average of about 16 times EBITDA for European real estate acquisitions announced in the past 12 months, according to data compiled by Bloomberg.
Simon also agreed to buy out venture partner Farallon Capital Management LLC’s stakes in 26 malls across the U.S. for about $1.5 billion. The deal includes repayment of loans. Simon will continue to manage the properties, which include a dozen sprawling “Mills” outlet malls.
Both purchases announced Thursday will immediately add to Simon’s funds from operations, Chairman and CEO David Simon said in the statement. Funds from operations, or FFO, which adds such items as amortization and depreciation to net income, is a common performance measure for real estate investment trusts.
Simon FFO this year will be $7.35 to $7.50 a share, the company said, raising a February forecast of $7.20 to $7.30.
“We have long been admirers of Klepierre, its pan-European footprint and growth potential,” David Simon said in the statement. He will become the chairman of Klepierre’s nine-member supervisory board, and Simon will appoint two others.
“The consumer know-how in Simon Group may be a lot better” than that at Klepierre, Devloo said.
The deal will reduce BNP Paribas’s stake in Klepierre to 22 percent, France’s largest bank said in a separate statement. The lender said it will keep the remaining Klepierre shares for at least a year.
BNP Paribas, hurt by losses on its Greek sovereign-bond holdings, announced a plan in September to dispose of assets and loan portfolios, including corporate-lending funded in U.S. dollars. The bank is trying to reach a common equity Tier 1 capital ratio of 9 percent by the end of the year to comply with stricter rules.
The divestment will help BNP Paribas contribute to its plan to increase the ratio by 100 basis points by Jan. 1, 2013, the lender said in a statement.
Simon has announced seven acquisitions in the past five years with an average disclosed deal size of $1.94 billion, including net debt. The largest was its purchase of Prime Outlets Acquisition Co. for $2.33 billion in 2009, according to Bloomberg data.