(Bloomberg) -- Simon Property Group Inc. is terminating its $3.6 billion bid to buy Taubman Centers Inc., arguing that its rival mall owner has breached the merger agreement by not taking steps to mitigate the fallout from the coronavirus pandemic.
Simon said in a statement on Wednesday it has “exercised its contractual rights” to terminate the deal, which was announced in February before the pandemic battered malls. The company said it was asking a court to declare that Taubman has suffered a “material adverse event” and “breached the covenants in the merger agreement.”
Taubman’s shares plunged more than 40% after the statement was released, before paring the losses. The stock finished Wednesday down about 20% at $36.17, the biggest single-day drop since December 2008.
Taubman didn’t immediately respond to a request for comment.
Simon also dipped on Wednesday, sliding 4% to $83.01. The stock had rallied recently on hopes for a faster than expected economic recovery.
Simon also dipped on Wednesday, dropping as much as 9.8% to $78. Its shares had rallied recently on hopes for a faster than expected economic recovery.
Taubman’s shares have been trading below the proposed deal price of $52.50 for months, raising speculation that the deal was in trouble or that Simon would seek to lower its bid
The move by Simon on Wednesday could be a negotiating tactic, according to Lindsay Dutch, an analyst at Bloomberg Intelligence.
Taubman could try to force Simon to close the original deal, but it might make more sense to work something out at a lower price, according to James Sullivan, an analyst at BTIG.
“The downside in Taubman shares might be as low as in the 20s if the deal didn’t close,” Sullivan said. “They have every incentive to negotiate a price cut and the question just becomes how much is appropriate.”
Simon and Taubman are two of the largest U.S. mall owners, and the deal was seen as a way for Simon to bulk up in its battle to retain shoppers increasingly drawn to the convenience of e-commerce.
Simon’s properties include Roosevelt Field, outside New York City, while Taubman owns Beverly Center in Los Angeles and Dolphin Mall in Miami.
Prospects for bricks-and-mortar retail have changed dramatically since the deal was announced. Stay-at-home orders to curb the spread of Covid-19 have shuttered stores, pushing more consumers online.
Landlords, already pressured by declining foot traffic and retailer bankruptcies, may face a wave of new vacancies as the pandemic forces more tenants out of business.
While Americans stuck inside for months have shown a willingness to return to stores, there are major challenges ahead for enclosed malls.
Simon argued in the statement that Taubman had failed to make “essential cuts” in operating expenses and capital expenditures and that the company’s properties have been hit particularly hard by the outbreak.
“Taubman’s significant proportion of enclosed retail properties located in densely populated major metropolitan areas, dependence on both domestic and international tourism at many of its properties, and its focus on high-end shopping have combined to impact Taubman’s business disproportionately due to the Covid-19 pandemic when compared to the rest of the retail real estate industry,” Simon said.
(Updates shares. A previous version of this story removed misattributed quote in 10th paragraph.)
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