Will a Takeover Battle
Spark Merger Activity?
NEW YORK -- A court ruling that appeared to pave the way for Simon Property Group Inc. to proceed with its hostile takeover bid for Taubman Centers Inc. could heat up merger-and-acquisition activity in the real-estate world.
Prior to this deal, hostile takeovers were rare in the REIT world. And companies with large family-ownership holdings, such as Taubman, were considered even more immune to takeovers.
"It's really unusual. They're breaking new ground here" with a hostile takeover of a company with strong family ownership, said Richard Imperiale, portfolio manager, president and founder of Uniplan Real Estate Advisors Inc. "Simon is blazing a trail for hostile [takeover] deals."
When Simon stepped up to the plate last November and announced a hostile tender offer for Taubman for $17.50 a share, investors and bankers watched intently. Simon later sweetened its offer to $20 a share, and challenged the legality of the Taubman family's 30.6% voting block in court.
A District Court judge recently appeared to back Simon's legal challenge when it ruled the Taubman family and certain family friends -- which made up a 33.6% voting stake -- could not vote their shares to block the merger. Taubman is appealing the decision.
Many on Wall Street believe the winds have shifted, and that Taubman will ultimately be sold. Even if Simon loses its bid to another suitor, the Simon/Taubman fight "dispels the myth that some REITs are impenetrable," said Bob Steers, co-portfolio manager at Cohen & Steers Capital Management Inc.
Mr. Steers said REITs with large family block positions could become targets if their stocks are trading at deep enough discounts.
He names Tanger Factory Outlet Centers Inc., Crown American Realty Trust, Kilroy Realty Corp., Macerich Co., Reckson Associates Realty Corp., Crescent Real Estate Equities Co. and Brookfield Properties Corp. as companies that have families who either own significant blocks of shares or control the company's management.
Valuation will likely dictate interest, he emphasized.
Taubman, for example, had been trading at a discount to its peers in the mall world as returns on some of its mall developments were slower and smaller than initially expected.
"It [the Simon/Taubman battle] may not embolden REIT executives, but it will embolden their investment bankers who are driven by fee-based transactions and will see this as a good precedent to get deals done," quipped Mr. Imperiale.
He named Kilroy and CBL & Associates Properties Inc. as companies with significant family ownership that may no longer be seen as immune to takeovers.
Matt Lustig, managing director of real-estate investment banking at Lazard Freres & Co. LLC, said the Simon/Taubman battle is "softening the feel of immunity that some families may have had" in REITs where families hold major blocks of shares.
He believes many REITs will likely be more open to at least considering takeover offers. There's a feeling that a board's time and reputation are on the line when defending against a hostile deal, which companies may want to avoid, said Mr. Lustig.
At the same time, though, he said, any buyer must be prepared to pay a premium to complete such a takeover.
Peter Fass, a partner at the law firm Proskauer Rose LLP, which works with REITs, said hostile takeovers are rare. He recalls how Manufactured Home Communities Inc. made an unsuccessful hostile takeover bid for Chateau Communities Inc. about seven years ago. Recently, it announced it's in talks to try to acquire the entity again -- this time through a negotiated agreement.
But if Simon is successful in its hostile bid for Taubman, it could "precipitate" other hostile takeovers in the industry, Mr. Fass said.
At the same time, certain factors -- such as the Sarbanes-Oxley Act -- are also making REIT boards more open to considering takeover offers. "There's a lot of adverse publicity if they don't consider a bid," which doesn't sit well with shareholders, he said.
Still, he said, any company contemplating such a move better have the arsenal to fight long and hard. "The Simon bid has already taken about six or seven months," he noted, and it's not over yet.
Ralph Watts, co-head of mergers and acquisitions in North America at Citigroup Global Markets, doesn't anticipate a rash of M&A deals in the wake of the Simon/Taubman battle even if Simon is successful. He said the Simon/Taubman situation was unique as the legal issues involved preferred shares and the State of Michigan's anti-takeover law.
Also, he said it would take a large, well-capitalized REIT with a strong balance sheet to pull off such a transaction.
"People may consider them on a unilateral basis, but they're very difficult to succeed," he said. "It's hard to raise equity capital to do a hostile bid," he said.
Watts speculates most companies would try a negotiated agreement first.
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