Simon Widens Overseas Reach With Klepierre Deal in Europe

Simon Property Group Inc CEO David Simon
Both purchases will add to Simon Property’s funds from operations immediately, Chairman and Chief Executive Officer David Simon said in the statement. Photographer: Jonathan Alcorn/Bloomberg

Simon Property Group Inc. is making its biggest purchase since 2010 by buying a stake in European shopping center operator Klepierre SA as it increases its investments outside the U.S.

Simon, the largest U.S. mall owner, agreed to acquire 28.7 percent of Klepierre from BNP Paribas SA for about 1.5 billion euros ($2 billion), the Indianapolis-based company said in a statement today. The 28-euro-a-share deal will be the company’s largest transaction since its $2.3 billion purchase of U.S. landlord Prime Outlets Acquisition Co., in August 2010.

“Part of the reason they’re looking internationally is because there aren’t a lot of near-term growth opportunities in the U.S. outside of buying a public competitor,” John Sheehan, an analyst at Edward Jones & Co. in St. Louis, said in a telephone interview. “They’re taking a pretty large ownership in this entity.”

Simon often enters joint ventures or acquires stakes in companies when doing deals -- such as its equity investment in the U.K.’s Capital Shopping Centres Group Plc, a mall owner it unsuccessfully attempted to buy last year -- and at times has been rebuffed in its attempts to make outright purchases of other retail landlords.

The largest U.S. real estate investment trust made a bid for General Growth Properties Inc., the second-biggest U.S. mall owner, after the Chicago-based company filed for bankruptcy protection in April 2009.

Takeover Fight

Simon got into a takeover fight for General Growth against an investor group that included Brookfield Asset Management Inc. and William Ackman’s Pershing Square Capital Management LP. The investor group prevailed and committed more than $8 billion to bring General Growth out of Chapter 11 in 2010.

“They’ve tried to buy a number of their competitors over the years,” said Sheehan, who has a hold rating on Simon’s shares. “In the U.S., they’ve had different levels of success.”

Simon had scaled back its European presence by selling stakes in ventures in France, Italy and Poland. The company said today that it doesn’t plan to buy any more Klepierre shares. The Paris-based retail owner, developer and manager has 271 shopping centers in 13 countries. About half the properties are in France and Belgium, and a fourth are in Scandinavia.

“We have long been admirers of Klepierre, its pan-European footprint and growth potential,” Chief Executive Officer David Simon said in today’s statement. He will become the chairman of Klepierre’s nine-member supervisory board, and Simon Property will appoint two other members.

International Moves

The Klepierre deal is “a very big move” for Simon, said Rich Moore, an analyst with RBC Capital Markets in Solon, Ohio. He rates the U.S. company’s shares outperform, meaning that he expects the stock’s return to exceed the average among its peers. “It tells you Simon’s next big moves are really international.”

Simon also agreed today to purchase joint-venture partner Farallon Capital Management LLC’s stakes in 26 malls across the U.S. in a transaction valued at about $1.5 billion, including loan repayments. The two acquisitions will immediately add to funds from operations, a cash-flow measure used by REITs, Simon said. FFO this year will be $7.35 to $7.50 a share, the company said. That’s higher than a February forecast of $7.20 to $7.30.

The mall owner will issue 7 million shares of common stock and three new series of senior unsecured notes with a combined principal of $1.5 billion to help fund the two deals, it said in a separate statement today.

Shares Outperform Index

Simon was little changed at $138.24 today in New York trading. The shares have increased 29 percent in the past year, more than the 4.8 percent gain in the Bloomberg REIT Index.

Analysts have 16 buy recommendations on Simon shares, eight holds and no sell ratings, according to data compiled by Bloomberg.

Lazard Ltd., J.P. Morgan Securities LLC and Goldman, Sachs & Co. served as financial advisers to Simon on the Klepierre transaction. Bank of America Merrill Lynch advised Simon on the U.S. purchase.

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