We recently learned that mall REIT Simon Property Group (SPG -0.03%) successfully renegotiated its acquisition of rival Taubman Centers (TCO) and will now be paying about 20% less than it originally agreed to before the COVID-19 pandemic disrupted the retail real estate industry. While the discounted price is certainly more attractive than the deal's original price, many investors still think it seems silly to spend billions of dollars on mall real estate right now.
Don't be so sure. In this Nov. 17 Fool Live video clip, two experts from The Motley Fool's real estate brand, Millionacres -- real estate analyst Matt Frankel, CFP, and editor Deidre Woollard -- discuss why this deal could be a great long-term move for Simon and its shareholders.
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Deidre Woollard: So speaking of flexibility and of liquidity, let's talk a little bit about Simon Property Group and the news this week that they've reached a deal with Taubman Centers. So obviously that was probably in the works before the vaccine because they were both headed to a legal battle which would have started on Monday. But do you think that investors feel better about this news because now there's potential for vaccines and that sort of lifting up retail REITs? Do you think the market would have looked at this a little bit differently without that news?
Matt Frankel: Well, it's like on the uncertainty topic. It definitely adds certainty to a very uncertain situation. Like you said, this has been in the works for a while. Simon agreed to buy Taubman before the pandemic at 20 percent higher-price than they were ultimately paying. So, what happened was Simon said that Taubman didn't do as good of a job preparing their properties for COVID as they could have, things like that, and backed out of the deal. The two sides sued each other.
Matt Frankel: That would have led to a costly legal battle. At the end of the day, Simon could have potentially been forced to complete the deal at the original price if the lawsuit hadn't gone their way. I think Taubman's lawsuit was suing them to make them go through with the deal. They could've had to pay the original price. This really builds on Simon's position as the market leader. Taubman was really the only other major Class A mall REIT in the market. I think there's one more, I just can't think of it off the top of my head.
Deidre Woollard: Macerich.
Matt Frankel: Macerich there you go. This makes Simon's Class A dominance even bigger. It should lead to some financial efficiencies. Simon is already a very efficient company because of its big scale. But this should lead to even more operational efficiencies. Simon has more than enough money to close on this transaction, $8.5 billion of liquidity, that's a huge sum of money. This is going to eat up a third of their cash to essentially acquire their biggest competitor. That's a pretty impressive statistic and the fact that it was resolved without a long legal battle and at a 20 percent discount for Simon, is a pretty nice thing. You're seeing Simon's stock bounce pretty nicely and that's a big move for such a large REIT. You're seeing that really reflected in the price this week.
Deidre Woollard: Do you feel like because of that, the other thing that Simon is doing, is that J.C. Penney (OTC: JCPN.Q) deal with Brookfield (NYSE: BAM). Do you think those two deals, do people think about them independently? Do they think about potentially, that there's some synergy there?
Matt Frankel: There's definitely going to be some synergy there. J.C. Penney is just the latest in a string of these deals that they're doing. Was it J. Crew, I think Brooks Brothers was another, Forever 21. There have been a few. At this rate, Simon's going to own the malls and everything in them.
Deidre Woollard: Right.
Matt Frankel: I'm pretty sure J.C. Penney won't be the last one that they do. Especially, since they said their first one which was done before the pandemic, Aeropostale, that was profitable. They said they are making money on that. That was a profitable deal and now that they are able to buy some of these retailers for fire sale valuations, there's definitely going to be some synergies. I don't know the exact number of J.C. Penney's that are in Taubman's properties, but I know it's quite a few. This allows them to control more of J.C. Penney's business and real estate. There's definitely going to be some synergies because everyone has been saying the whole time, this is a real estate play. They don't really want to own J.C. Penney, they want to control the shelves that J.C. Penney is in. This allows them to, with that J.C. Penney deal, do even more of that. I'm happy about this in several different ways and it looks like investors are as well.
