DOW JONES NEWSWIRES
NEW YORK -- Taubman Centers Inc. (TCO) has taken a step forward in its fight to stop Simon Property Group (SPG) from taking over the company for $18 a share.
In a complex agreement, Taubman has agreed to provide mezzanine financing to Gordon Group Holdings LLC in a deal that will ultimately boost -- at least perceptually -- the value of Taubman's shares to $24 a share.
Under the deal, Taubman will provide $72 million in financing to Gordon Group and form a joint venture with Gordon to help Gordon acquire the prestigious Forum Shops in Las Vegas. At the moment, Gordon holds a 42% stake in the Forum Shops, and wants to either buy out its existing partner's stake in the mall or sell off its stake altogether.
Taubman stands to benefit regardless of whether Gordon buys out its partner or sells its interest in the mall.
If Gordon buys out its partner, Taubman will get preferred shares in the venture with a 12% coupon and the right to buy a one-third ownership stake in the Forum Shops using Taubman operating partnership units. It's this latter condition that has the potential to boost - at least in appearance - the value of Taubman's shares.
Under the agreement, Taubman will issue 2.42 Taubman partnership units for a one-third ownership stake. These terms value Taubman's partnership units at $24 apiece, which is far superior to the $18-a-share offer Simon Property made in its hostile takeover bid for Taubman.
If Gordon sells his stake to his existing partner, he must still invest in Taubman - $50 million for 2.08 million Taubman partnership units, which again values Taubman's units at $24 a piece.
Some market experts speculate that Taubman's deal is aimed at boosting his company's value so that it can dismiss Simon's takeover offer as insufficient.
Sweetening the deal further for Taubman is the fact that Gordon's existing partner in the Forum Shops is Simon Property Group. This means if Gordon acquires Simon's stake, Taubman will become a minority owner and manager of one of Simon's most prestigious malls. Simon has 30 days to decide if it will buy out Gordon's stake or sell off its own.
The Forum Shops has about 500,000 square feet of space and plans are in the works to expand the mall by another 175,000 square feet.
"It's a very clever transaction on Taubman's part," said Morgan Stanley analyst Matt Ostrower. He speculates that Taubman will likely try to use the OP pricing as a way to argue that his company is worth more than Simon's $18 a share takeover bid.
"We view this transaction as very much a part of the Simon/Taubman (takeover) saga," he said.
Ostrower speculates that Gordon likely had "few capital alternatives" and this is why it agreed to buy "highly-priced Taubman units" as part of the funding arrangement.
"Whenever someone offers to pay more than the market price for shares, I have to ask the question - what am I missing?" said Ostrower.
"We believe it is important not to extrapolate too much from Gordon's $24 a unit investment," he said.
Thomas Weisel Partners LLC analyst Paul Morgan concurred. Although the $24-a-share equity investment appears to raise the bar for Taubman's valuation far above Simon's offer, "we believe the $24 share price is largely an artifact of the agreement's structure and does not reflect a true bid price."
Morgan said Taubman's management is "clearly doing everything possible to avoid a merger with Simon, and has been successful to date at frustrating efforts to consummate the deal."
Taubman has been butting heads with Simon Property Group since Simon made an unsolicited bid last October to acquire the real estate investment trust in a $4 billion bid. Initially, Simon offered $17.50 a share plus assumed debt, but later sweetened the offer to $18 a share.
Taubman rejected the offer, and Simon then went public with it, accusing the Taubman family of not being accountable to its shareholders. The Taubman family holds more than a 30% voting stake in the REIT through series B preferred stock that was issued to the family during a restructuring transaction in 1998. Simon has filed suit in U.S. District Court for the Eastern District of Michigan, challenging this voting stake.
Thomas Weisel Partners' Morgan does not hold shares in either company nor does his firm have an investment banking relationship with either one.
Morgan Stanley's Ostrower does not hold shares in either company. However, his firm has had an investment banking relationship with both Simon and Taubman.