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Is Taubman Centers a Buy?

Jul 21, 2020 by Marc Rapport

Deciding whether to buy Taubman Centers (NYSE: TCO) stock is a bit different than considering whether to buy your typical REIT for reliable income and slow but steady growth.

That’s because the Michigan-based shopping mall REIT is trying to force through a takeover from longtime rival Simon Property Group.

In a $3.6 billion cash deal announced in February, Simon agreed to buy 80% of Taubman’s common stock at $52.50 a share, which at the time was a 51% premium. At close on Friday, July 17, Taubman stock was trading at $38.42 – a smaller premium but still a nice gain, if the deal goes through.

And that’s a very big if. SPG announced in June that it was terminating the deal, citing Taubman’s failure to "take steps to mitigate the impact of the coronavirus epidemic centers on its centers," according to a Forbes article that details Simon CEO David Simon’s insistence that his own firm is not a mall company.

Why buy a mall company?

Litigation commenced, and if court-ordered mediation doesn’t settle the matter, they could end up in court in November.

That, of course, raises the question, if you’re not a mall company, why are you trying to buy a mall company? Perhaps the pandemic’s devastation of brick-and-mortar retail was too much to swallow.

And if it’s too much for someone like David Simon, should you consider buying in?

There’s some other irony there, in that Taubman is now trying to force a sale to a company that it once fought off.

Some American mall history

A. Alfred "Al" Taubman is a legendary name in American retail shopping history as one of the pioneers of the modern mall, especially with an eye on luxury shopping.

Taubman created the company in 1950 in Pontiac, Michigan. He bought his first shopping center in Flint, Michigan, in 1953 and the company’s first enclosed mall, Southland Mall, in 1964 in Hayward, California. Taubman Centers was incorporated in 1973 and the company went public via IPO in 1992.

Then, in 2003, the family-controlled Taubman Centers fended off a hostile takeover attempt from Simon Property Group, with help from friendly state lawmakers who changed Michigan’s takeover laws at Taubman’s behest.

Al Taubman died in 2015 as a billionaire whose legacy includes doing a brief prison stint over art market price fixing (after he bought the Sotheby’s auction house) and being the largest donor in the University of Michigan’s history.

He also was the majority owner of the United States Football League’s Michigan Panthers, which in 1983 handed the city of Detroit its first professional football title since 1957.

(A personal note: I was working for a news agency in Detroit at the time. Al Taubman got a lot of positive press and public love for delivering a championship to the Motor City that year, one of two in the Panthers’ existence. The USFL itself was an interesting upstart to the NFL to cover, stealing big-name players and competing directly against the NFL in its major markets. Another owner -- of the New Jersey Generals -- was a brash, young New York City developer named Donald Trump who also had just built a Manhattan tower bearing his name.)

Why buy a mall company, even with a colorful history?

So, this is an interesting company, with a colorful story embedded in the history of America’s malls themselves, but is it a buy?

If the deal goes through at $51 a share or something close to it, that would indeed be a nice premium over the $38 it’s trading at now. Even if the mediation ends up with a Solomonic split down the middle and they settle for about $45 a share, that’s still a nice gain of about 18% for something that could happen fairly soon.

But what if that doesn’t happen, and it ends up in a protracted court battle or Taubman decides to accept some other settlement terms and just goes away?

Then you own shares in a REIT that owns, manages, and/or leases 26 regional and super-regional shopping centers, including some outlet centers, in major U.S. markets and in China and South Korea.

And what about no declared dividend?

Those are all markets struck by the pandemic, of course, but the company says that’s OK.

"Nearly 85% of stores in our portfolio have reopened, with more opening every day," CEO Robert Taubman said in a June 30 news release. "We are pleased to safely welcome customers back, and we are encouraged by the results we are seeing."

But what about the dividend? Like many others, the company announced that it won’t be declaring a second quarter dividend on its common stock. That’s after paying 39 cents a share in first-quarter dividends.

"The board will monitor the company’s financial performance and liquidity position on an ongoing basis and will consider reinstating the common dividend at a later date," that June 5 announcement said.

Buy for the premium, not the potential

Before the pandemic, Simon believed it could buy and revive Taubman’s aging properties with new looks and new consumer experiences. Now it's looking like the company doesn’t think so.

Even Taubman’s own efforts to offset lost revenue from rent difficulties -- including cutting $10 million in operating expenses and deferring $100 million to $110 million of capital spending -- wasn’t enough to convince Simon that Taubman was doing enough to help its own case.

So, is Taubman a buy? With no dividend immediately forthcoming and a portfolio committed pretty much exclusively to physical retail, it doesn’t look like a buy and hold. If you think Simon will still end up buying Taubman for some premium over the current share price, jump in. Stranger things have happened.

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Marc Rapport has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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