The clock continues to wind down on the deadline for The Macerich Co. to either accept or reject Simon Property Group Inc.’s best and final offer to acquire all outstanding shares of Macerich for $95.50. The deadline is April Fool’s Day, and there’s a lot of debate about which would be more foolish: accepting Simon’s offer or rejecting it.
The total value of the proposed transaction is approximately $23.2 billion, including assumption of approximately $6.4 billion of Macerich debt outstanding (including its pro rata share of mortgage debt from unconsolidated entities).
“From my perspective, Simon’s offer is more than fair,” says Alexander Goldfarb, a managing director with Sandler O’Neill + Partners. “But Macerich’s management may well arrive at a different conclusion.”
Based on Sandler O’Neill + Partners’ math, Simon’s current offer for Macerich translates into an implied cap rate of 4 percent. It exceeds the firm’s assessment of Macerich’s undiscounted NAV of $86, which includes $13 of undiscounted development potential. On average, The Street is valuing Macerich’s NAV at $74.88.
Comparing margins
Santa Monica, Calif.-based Macerich already rejected Simon’s first unsolicited offer of $91 per share, saying that the bid significant undervalued the company. The REIT, which owns 54 million sq. ft. of real estate consisting primarily of interests in 51 regional shopping centers, also implemented defensive governance changes to prevent a hostile takeover. The changes include a staggered board and shareholder rights plan.
Including Macerich, only five publicly traded U.S. equity REITs have both anti-takeover provisions in their corporate governance, according to SNL Financial. Currently, 42 publicly traded U.S. equity REITs have staggered boards, but only one other mall REIT—Taubman Centers Inc.—has one.
Macerich explained its justification for rejecting Simon’s initial offer in a March 17 presentation. It pointed out that it has more than $1 billion of off-the-radar projects that are expected to be completed between 2018 and 2020. It also cast doubt on whether Simon does a better job operating its properties.
Simon responded with its own presentation, which broke out the productivity of its assets. Forty-two centers generate more than $726 per sq. ft. while 17 generate more than $1,088 per sq. ft. In comparison, Macerich has 11 centers (out of 51 total centers) that generate more than $700 per sq. ft.
Simon’s malls average $631 per sq. ft. with 96.6 percent occupancy and 74 percent margin versus Macerich’s total portfolio average of $574 per sq. ft. with 95.8 percent occupancy and 58 percent margin.
“Looking at the financial statements and what Simon and Macerich have disclosed, Simon seems to operate at higher margins,” Goldfarb says. “They’re obviously doing something where they’re able to get them at a higher operating margin.”
Macerich, meanwhile, excels at development and redevelopment, which explains why Simon is interested in acquiring the REIT. “There’s no way to replicate Macerich’s portfolio,” Goldfarb says. “They have an incredible portfolio of malls, especially those in Arizona and California.”
Independent streak
Simon’s decision to enforce a deadline for its offer isn’t surprising, according to experts. “They don’t want a protracted battle,” Goldfarb says, adding that it’s better to move on instead of drag things out.
David Simon, Simon’s chairman and CEO, said in a statement: “We believe our offer is compelling and will deliver significant and immediate value to Macerich shareholders. We encourage the Macerich board to give our proposal the serious consideration it deserves and to take into account the views of Macerich shareholders.”
However, Goldfarb doesn’t think Macerich’s management team will be swayed by either The Street or shareholder opinion. “They’ve always been very independent, and they don’t let outside forces pressure them into making a decision they don’t want to make,” he says. “I don’t see that independent streak ending. I think Macerich can make case internally to its board that [the company] has improved dramatically over the past five years and that it has a huge pipeline that would create a lot of future value.”
If Macerich did accept Simon’s offer, the deal could be a high-water mark for public REIT M&A activity, according to SNL. Together, Simon and Macerich would create the largest equity REIT in the world, by a wide margin, with a combined market cap of nearly $70 billion. It would also be the largest public REIT-to-public REIT M&A transaction in history.
According to SNL, the top 20 M&A deals in which the target was a public REIT have been priced at an average 9.9 percent premium to the target’s unaffected stock price and an average premium of 12.9 percent to the target company’s unaffected consensus NAV estimate.