U.S. Markets closed

Will Simon Property Group’s spinoff parts be worth more separated?

Brent Nyitray, CFA, MBA

Must-know takeaways from Simon Property Group's spinoff (Part 3 of 3)

(Continued from Part 2)

Details of the transaction

The transaction is intended to be a tax-free distribution to Simon shareholders and LP unitholders for U.S. federal income tax purposes. Spinco intends to be treated as a REIT for U.S. federal income tax purposes. The distribution of Spinco common shares or limited partnership units will be via a prop rates special distribution. Following the distribution, SPG shareholders will own shares in both Simon and Spinco. The number of Simon shares or Simon LP units owned by each shareholder or limited partner won’t change as a result of the distribution.

Anticipated timing of the transaction

Simon Property Group will file the initial Form 10 information statement with the SEC before year end. Further announcements regarding the Spinco executive management team will take place during the first quarter of 2014, with a targeted completion date in the second quarter of 2014. The necessary conditions are an effective SEC registration statement, filing and approval of Spinco listing on the relevant exchange, final approval and declaration of the distribution by Simon’s Bord of Directors, and other customary conditions. There’s no need for a shareholder vote.

Will the parts be worth more separated?

Simon seems to be doing this in order to boost growth at the SPG level. It’s spinning off the low-growth assets in the hope of a higher multiple for SPG. The rationale seems to be that increased transparency will benefit both companies—in other words, Simon must feel like these assets are under-appreciated in the current SPG structure and believe that the Street will take a different view of them if it’s in a separate company. It’s an interesting theory, but the Street’s muted reaction to the deal probably says all that needs to be said.

For Simon Property, this will allow management to focus its time and energy on its best-performing assets—the large malls, premium outlets, and Mills assets, all while maintaining scale and conservative leverage. Several of Spinco’s anchor tenants are struggling, but the company denied that this was the reason.

Spinoffs of lower-growth businesses generally trade like orphans. Growth investors don’t want them, and they need to trade extremely cheaply for value players to really care. When a slow-growth company spins off a higher-growth unit, growth investors will clamor for the fast-growing unit, and there may be some sponsorship. That isn’t the case here. Spinco will probably not interest anyone who wasn’t already interested in SPG. That usually means there’s a supply and demand imbalance—at least initially—as there are more people interested in unloading the spinoff than there are new investors who will want to pick some up. Finally, Simon Property Group will be bought by merger arbitrage investors who will probably sell soon after completion, as they’re investors who purchase catalyst-driven investments and aren’t buy-and-hold types. This will put additional selling pressure on the stock.

Until we have better data, it’s hard to come up with an anticipated valuation for the spinoff. Certainly for SPG shareholders, it will act as somewhat of a dividend increase in that they’ll get an additional dividend while SPG maintains its current dividend. For Simon Property Group investors, a slightly higher multiple may be warranted to reflect the higher growth rate. However, investors usually find that these spun-off assets trade at lower multiples than hoped. It’s easy to see why the Street didn’t get all that excited about the deal.

Browse this series on Market Realist: