Simon Property May Bid for Capital Shopping to Expand in Europe

Simon Property Group Inc. (SPG), the largest U.S. shopping mall owner, may try to expand in Europe by attempting a takeover of its British counterpart, Capital Shopping Centres Group Plc.

Simon, which owns 5.6 percent of Capital Shopping, said in a Nov. 24 letter that it may make a cash offer for more than the company’s net asset value, which totaled 2.3 billion pounds ($3.6 billion) at mid-year. The London-based landlord’s shares have gained 19 percent since it announced Simon’s plans yesterday.

“They’re more than capable and more than interested,” Rich Moore, an analyst at RBC Capital Markets, said of Simon Property. “Does Capital want to sell and can they agree on a price that makes sense? Simon will not overpay. That is not their history.”

Capital Shopping disclosed Simon’s intentions while announcing an agreement to buy the Trafford Centre mall near Manchester, England, from closely held Peel Group for 747.6 million pounds in securities and 852 million pounds of assumed debt. To help finance the purchase, Capital Shopping raised 221.2 million pounds by selling shares equal to 9.9 percent of its equity outstanding. The mall owner said it rejected a request from Simon to delay the purchase and equity offering.

Les Morris, a spokesman for Simon in Indianapolis, declined to comment.

Simon Chief Executive Officer David Simon has said his company is looking for acquisitions. The Indianapolis-based landlord in August bought an outlet-center business and, among U.S.-based real estate investment trusts, already is the biggest regional mall owner outside the country, according to Moore.

Cash on Hand

Simon had $1.3 billion in cash and $3 billion available on a credit line as of Sept. 30. It raised more than $1.54 billion in two stock sales in the first half of 2009, and sold $500 million of five-year notes in August of that year. In January, Simon sold $2.25 billion of debt, comprising five- and 10-year notes and 30-year bonds.

When Simon acquired a stake in Capital Shopping about two years ago, speculation arose that it might buy the whole company, said Moore, who has a “top pick” rating on Simon.

Capital Shopping shares rose 20 pence to 401 pence today, bringing its two-day gain to 63.6 pence. With the gain, the company has a market value of about 2.5 billion pounds. Yesterday’s 13 percent advance was the biggest since Capital Shopping became publicly traded in 1992.

Simon shares fell $1.43, or 1.4 percent, to $98.84, in New York Stock Exchange trading at 1:30 p.m. Simon didn’t trade yesterday because of the Thanksgiving Day holiday in the U.S.

No Price Given

While Simon said it would pay more than Capital Shopping’s net asset value if it makes an offer, it didn’t indicate a price, the British company said. Its net asset value was 368 pence a share on June 30, and it had about 629.3 million shares outstanding before yesterday’s stock sale.

The company would have to offer more than 450 pence a share “to get people’s attention,” said Steve Bramley-Jackson, a London-based analyst at Credit Suisse Group AG. That price is 12 percent higher than Capital Shopping’s closing price today and 22 percent more than the estimated net asset value.

Simon also may face an implicit deadline of Dec. 20 for making a bid, Bramley-Jackson said. That is the date when Capital Shopping shareholders are scheduled to vote on the Trafford acquisition. If approved, the mall would make Capital Shopping a bigger acquisition target for Simon to swallow.

Trafford Purchase

With the Trafford purchase, Capital Shopping will own four of the seven biggest U.K. shopping centers, the company said on its website, citing Property Market Analysis. Peel Group will own 19.9 percent of Capital Shopping when the deal is completed, making it the largest shareholder, and its holding would rise to 24.9 percent assuming a full conversion of bonds used to help finance the purchase.

Simon is more likely to make an acquisition than use its capital for developing new malls, said Moore of RBC. Simon already has operations and developments in such countries as Japan, France and China.

“When they allocate capital, they’re astute and they’re cautious," said Cedrik Lachance, senior analyst at Green Street Advisors Inc., a real estate research company in Newport Beach, California. "They’ve obviously owned a stake in Capital Shopping for a couple years now so we’ll see what they do. Simon is careful when making external-growth plays."

Earlier this year, Simon bid unsuccessfully for U.S. rival General Growth Properties Inc. (GGP), which emerged from the largest-ever U.S. real estate bankruptcy on Nov. 9.

‘‘Were they disappointed? They were,” said Moore of RBC. “But there is no added sense of urgency” about making acquisitions as a result, he said.

To contact the reporters on this story: Hui-yong Yu in Seattle at hyu@bloomberg.net; Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Andrew Blackman at ablackman@bloomberg.net

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