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Macerich investors want more to clinch mall megadeal

March 9, 2015

Simon Property Group Inc.’s $22.4 billion appraisal of shopping mall rival Macerich Co. is coming up short with investors.

The offer is only 6.6 percent higher than Macerich’s average price in the previous 20 days. One reason the premium looks miniscule is because Macerich’s stock had already jumped 24 percent since November on takeover speculation fanned by Simon’s purchase of a small stake. Even so, Macerich traded on Monday above Simon’s $91-a-share bid to acquire the rest of the company, signaling that shareholders are intrigued but think the price is too low.

Simon, the biggest U.S. mall landlord, made the proposal public after discussions between its CEO, David Simon, and Macerich chief Arthur Coppola didn’t go anywhere. If Santa Monica, California-based Macerich were prepared to accept the transaction, a joint agreement probably would have been reached behind the scenes first, said Jeffrey Langbaum, an analyst for Bloomberg Intelligence.

“This has basically been a poorly kept rumor since November,” and “Macerich has so far been unwilling to bite,” Langbaum said in a phone interview from Princeton, New Jersey. “The market is betting that a deal will get done, but that $91 is not the number.”

Macerich shares rose more than 6 percent on Monday afternoon, to close $92.76 each.

Western expansion

Corporate takeovers are one of the few ways large U.S. mall owners such as Simon can grow because high-quality properties rarely come up for sale. In what would be Simon’s biggest purchase, the Indianapolis-based company would gain more properties in the western states such as California and Arizona. Analysts also see Macerich’s operating profit doubling this year, according to the average of 10 estimates compiled by Bloomberg.

Simon probably wouldn’t start with its best and final offer, Paul Adornato, a New York-based analyst for Bank of Montreal, said in a phone interview. He estimates that the $91 bid translates to a 4.8-percent capitalization rate, a measure of investment yield used in real estate that’s calculated by dividing net operating income by sale price.

Assuming Simon can pay a 4.5-percent cap rate, that implies a takeout price of $99 a share for Macerich, or $115 at a 4-percent rate, he said.

“Perhaps at or near these prices, Macerich may be tempted,” Adornato said. And it would still be cheaper than other recent transactions involving “top-quality malls,” such as General Growth Properties Inc.’s joint-venture deal for the Ala Moana Center in Honolulu, which sold this month for about a 3-percent cap rate, he said.

Opening salvo

Macerich will likely look for other suitors willing to pay more than $91 a share, according to Nathan Isbee, an analyst for Stifel Financial Corp. General Growth Properties, the other industry giant, has an agreement to buy some Macerich assets in connection with the Simon deal, though that wouldn’t necessarily prevent it from bidding for Macerich itself. Some private-equity firms have also taken an interest in REITs in the past.

“We think $91 is just an opening bid/salvo in what could be a long takeover battle,” Isbee wrote in a report. “Macerich could hold out for at least a high $90s bid.”

Also on Monday, Simon said said it has reached an agreement to sell certain Macerich assets to Chicago-based General Growth Properties Inc., the No. 2 U.S. mall landlord, in connection with completion of the deal.

The properties Simon agreed to sell to General Growth represent close to 20 percent of the deal value, or about $4 billion, two people with knowledge of the matter said. The proceeds of the sale will be used to pay down debt, the people said, asking not to be identified discussing private information.

While some retailers have contracted, malls with higher sales have maintained elevated occupancies and generated better growth in same-store net operating income, Jeffrey Langbaum, a REIT analyst with Bloomberg Intelligence, wrote in a report on March 5.

After spinning off its lower-tier shopping centers last year, Simon’s portfolio had average tenant sales of $619 a square foot in the fourth quarter, above the mall REIT average, with Macerich’s $587 average only slightly lower, according to Langbaum.

The deal between Simon and General Growth “may signal that General Growth isn’t interested in bidding for the entire company,” Langbaum wrote in a report Monday. “As the second- largest mall REIT, General Growth would be a potential bidder for Macerich in an effort to compete with Simon, and perhaps the only REIT besides Simon that could absorb Macerich.”

Before Simon’s share purchase disclosure last year, Macerich said it bought the share of five U.S. shopping malls it didn’t already own from a subsidiary of the Ontario Teachers’ Pension Plan Board for $1.89 billion, including the assumption of debt. The purchase price included $1.22 billion of stock issued to the pension plan, or an ownership of almost 11 percent, at $71 a share.

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