Simon Property backs out of acquiring rival

Shoppers walk though the Mall of America in Bloomington, Minnesota, on Wednesday. (Emilie Richardson/Bloomberg)

Simon Property Group is terminating its $3.6 billion bid to buy Taubman Centers, arguing that its rival mall owner has breached the merger agreement by not taking steps to mitigate the fallout from the coronavirus pandemic.

Simon said in a statement on Wednesday it has “exercised its contractual rights” to terminate the deal, which was announced in February before the pandemic battered malls. The company said it was asking a court to declare that Taubman has suffered a “material adverse event” and “breached the covenants in the merger agreement.”

Taubman didn’t immediately respond to a request for comment.

Taubman’s shares plunged more than 40% after the statement was released, before paring the losses. The stock was down 22% to $35.35 as of 10:52 a.m. in New York., the biggest intraday drop since December 2008.

Taubman’s shares have been trading below the proposed deal price of $52.50 for months, raising speculation that the deal was in trouble. Simon also dipped on Wednesday, dropping as much as 9.8% to $78. Its shares had rallied recently on hopes for a faster than expected economic recovery

Prospects for bricks-and-mortar retail have changed dramatically since the deal was announced. Stay-at-home orders to curb the spread of Covid-19 have shuttered stores, pushing consumers deeper into online shopping.

Landlords, already pressured by declining foot traffic and retailer bankruptcies, may face a wave of new vacancies as the pandemic forces more tenants out of business.

For months, analysts and industry observers have speculated that Simon would seek to get a lower price for a deal that was announced weeks before the U.S. economy was shuttered by the pandemic, which has been particularly hard on malls and retailers.

The move by Simon on Wednesday could be a renegotiating tactic, according to Lindsay Dutch, an analyst at Bloomberg Intelligence.

“If Taubman’s stock drops by a certain amount, maybe they would try to go renegotiate,” Dutch said.

While Americans stuck inside for months have shown a willingness to return to stores, there are major challenges ahead for enclosed malls.

Simon argued in the statement that Taubman had failed to make “essential cuts” in operating expenses and capital expenditures and that the company’s properties have been hit particularly hard by the outbreak.

“Taubman’s significant proportion of enclosed retail properties located in densely populated major metropolitan areas, dependence on both domestic and international tourism at many of its properties, and its focus on high-end shopping have combined to impact Taubman’s business disproportionately due to the COVID-19 pandemic when compared to the rest of the retail real estate industry,” Simon said.

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