Simon Property just can’t win. The U.S. mall company’s stock dropped as much as 10% on Wednesday morning after it walked away from the purchase of rival Taubman Centers, saying its target had mishandled Covid-19. Simon appears to want a clean break rather than just a better price, unlike some other repentant dealmakers. Still its U-turn isn’t exactly a vote of confidence.
Malls sit at the center of converging crises. Until February, the main one Simon was taking on was the effect of e-commerce on brick-and-mortar store owners. The pandemic took consumers’ waning interest in trotting around shopping malls and crushed it altogether. Lengthy lockdowns threaten to cement the habit of buying online.
Where Simon is fortunate is that it negotiated an exit route in case of a pandemic. It can renege on the deal if an outbreak were to affect Taubman disproportionately. That’s possible to argue. Taubman focuses on high end markets, like Los Angeles, Miami, and Short Hills, New Jersey that rely on sales of discretionary goods like handbags and shoes, and tourist traffic. Neither is coming back into fashion any time soon.
But Simon’s other complaint – that Taubman didn’t cut costs enough in response to the pandemic – is a little thin. Taubman is valued at roughly 9 times historical earnings versus Simon’s 22 times. Sure, if Taubman loses a couple of years’ worth of earnings, it doesn’t look so cheap. But the fat that Taubman didn’t cut should still be there for a new owner to trim instead. And if prospects for malls recover, Taubman’s long-term value shouldn’t be so different.
That’s the awkward part. Simon’s eagerness to walk away suggests that it thinks the long-term picture for Taubman is permanently dented. And that pings back on Simon too, since it also operates shopping malls. Whereas Simon could have pushed ahead with a merger in a tough trading climate, knowing that it at least has the benefit of greater scale and cost cuts, both sides now have to fight similar battles on their own.