On February 10, just as the world we becoming aware of the coronavirus pandemic which would become the final nail in the coffin of brick and mortar retail outlets, sending countless of companies to a long overdue date with bankruptcy judges, mall giant Simon Property Group stunned the market when it went against the grain of imploding malls and said it would acquire Taubman Centers for $52.50 a share, a 51% premium to where the shares had been trading.
The deal, which was expected to close within about six months, came as mall operators facing sharply lower foot traffic (and a total collapse thereof just one month later), were under increasing pressure to lure shoppers, who more and more favor buying products online or at strip malls where it is easy to dart in and out with purchases.
Well, moments ago we learned that that particular deal is not going to close, because Simon, which is known for owning and operating top-tier shopping malls, announced that it has exercised its contractual rights to terminate its February 9, 2020 merger agreement with Taubman Centers. SPG filed an action today in the Circuit Court for the 6th Judicial Circuit of Oakland County, Michigan against Taubman Centers and The Taubman Realty Group Limited Partnership requesting a declaration that Taubman has suffered a Material Adverse Event under the Merger Agreement and has breached the covenants in the Merger Agreement governing the operation of Taubman’s business.
This is what Simon said in the press release as grounds for invoking the MAE:
As detailed in the complaint filed this morning, Simon’s termination of the Merger Agreement is based on two separate and independent grounds.
First, the COVID-19 pandemic has had a uniquely material and disproportionate effect on Taubman compared with other participants in the retail real estate industry.
Second, in the wake of the pandemic, Taubman has breached its obligations, which are conditions to closing, relating to the operation of its business. In particular, Taubman has failed to take steps to mitigate the impact of the pandemic as others in the industry have, including by not making essential cuts in operating expenses and capital expenditures.
The Merger Agreement specifically gave Simon the right to terminate the transaction in the event that a pandemic disproportionately hurt Taubman. 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. In addition, Taubman has breached its obligation to operate its business in the ordinary course.
The terminated deal which lasted all of four months, becomes the first major casualty of the collapse in malls suffered in the aftermath of the coronavirus crisis.
In kneejerk reaction Taubman shares plunged 38%, reversing all gains from the February deal announcement…
… while sending Tiffany and Casears shares sharply lower as investors grow concerned that other similar pending mergers may also be unwound.