Simon Acquisition Seen
As Good Strategic Move
June 22, 2004 -- NEW YORK -- News that Simon Property Group Inc. agreed to acquire Chelsea Property Group Inc. in a $4.85 billion deal is being hailed by Wall Street as a good strategic move, although a bit pricey.
Under the agreement, Simon will pay Chelsea $3.5 billion in cash and stock, and assume $1.3 billion in debt. When transaction fees are added in, the deal is valued at $4.85 billion, according to Simon Property Chief Executive David Simon.
Each Chelsea common share will be exchanged for $36 in cash, $15 in Simon common shares and $15 in convertible preferred shares. The offer, based on current prices, works out to about $66 a share, which represents a 13% premium to Chelsea's closing price on June 18 and a 63% premium to the company's net asset value, or NAV, according to a note issued by Lehman Brothers Inc. analyst David Shulman.
Market experts said the deal appears pricey on the surface. However, they also said they see considerable growth and strategic benefits from Simon's standpoint, which justifies its decision.
"It's a very compelling price," said Michael Torres, president of Lend Lease Rosen, which holds shares of both companies. "As a Chelsea shareholder, we're very happy about it. It's a good day," he said.
Still, Torres noted that Chelsea's management took significant equity in Simon as part of the deal, which demonstrates its commitment to continue to expand Chelsea under the Simon umbrella. And he believes Simon stands to gain considerably from this growth.
Several Benefits Seen
RBC Capital Markets analyst Jay Leupp sees Simon benefiting in several ways.
First, the deal moves Simon into a new retail area - outlet malls - which will add another dimension to the retail choices it can offer its tenants, said Leupp.
Second, the merger will expand Simon's geographical reach. In particular, it marks the company's entry into the Asian market, where Chelsea now owns four outlet malls. Asia is a market Simon has been eyeing for some time.
And third, by acquiring an entire portfolio, Simon will be able to grow at a faster pace than it would had it purchased assets individually, Leupp said.
"It's a win-win for both sides," said Mark Zeisloft, portfolio manager at RREEF, the pension-fund advisory arm of Deutsche Bank AG, which also holds shares of both companies.
He noted that many pension funds and companies are buying malls at only 6.5% cap rates - or return on investment - these days. Yet this transaction allows Simon to buy an entire portfolio and savvy management team at a 7.2% cap rate. And he believes the potential for growth at Chelsea is extraordinary.
Chelsea has a healthy development pipeline and a knack for delivering blockbuster returns on its developments. During a conference call Monday, David Simon told investors and analysts that his company had 16% returns on three development projects it did with Chelsea in the past.
"[Simon and Chelsea] have had a long relationship together. They've done things together, and they've made money together," said Torres.
This history gives Wall Street confidence that the two will work well together in a single company.
For many, news of the deal caught the market by surprise. "It was an eye-opener," said Leupp, who had met with both management teams over the past five weeks and was given no indication there was anything brewing between the two real estate investment trusts. "Both really played their poker faces," he said.
During a conference call Monday, executives said the deal came together quickly - with much of the discussions happening over the past week, although the two had known each other since 1998.
Chelsea CEO: Fair Price
Chelsea Chief Executive David Bloom emphasized that his company was under "no pressure" to sell itself and that he agreed to the deal only because he felt the price was fair to shareholders and would allow his management team to continue operating Chelsea as a unit of Simon. Bloom said he did not consider offers from any other company.
Analysts say both companies have been leaders in consolidating in their sectors: Simon is the largest publicly traded mall owner in the U.S. and Chelsea is the biggest publicly traded outlet center owner in the U.S. And both companies tend to focus on high-quality assets in prime markets.
Shulman, the Lehman analyst, speculated in a note that Simon may be trying to expand its global footprint so that it's better able to compete with Westfield of Australia, which recently merged the assets of Westfield Holdings Ltd., Westfield America Trust and Westfield Trust to form the world's largest shopping mall company.
The Simon/Chelsea merger will add at least 9 cents a share to Simon's funds from operations in 2005 and 18 cents a share in 2006. (Thomson First Call pegs Simon's 2005 FFO at $4.62 a share.)
The deal, expected to close in late October, is taxable to Chelsea's common shareholders, who will receive a combination of cash, common shares and convertible preferred shares. (The convertible preferreds, which offer a 6% yield and a $63.86 conversion price, have a contingent conversion feature that insists common shares trade 25% higher than the conversion price - or about $80 a share - for 20 of 30 trading days in order for the holder to convert them.)
Chelsea unitholders cut a slightly different deal, where they will receive solely equity, which will not be taxable.
If either side opts to walk away from the deal, the company will face a $110 million breakup fee.
UBS and Morgan Stanley advised Simon on the deal, while Merrill Lynch & Co. advised Chelsea.
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