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Will Simon’s bid for Taubmansucceed in round three?Wall Street weighs in

Wall Street is divided as to how successful Simon’s continued attempts to acquire Taubman Centers will be. Today, Taubman’s board of directors unanimously rejected Simon’s second tender offer of $18 per share, deeming it "inadequate and opportunistic." This latest bid was 3 percent higher than Simon’s initial bid of $17.50. The proposed transaction would have offered an all-cash tender of $1.5 billion directly to Taubman shareholders to acquire all of the Bloomfield Hills, Mich.-based REIT’s outstanding shares.

"Simon’s hostile offer is not a logical catalyst for a sale. The board’s position remains clear — the company is not for sale," Taubman president and CEO Bob Taubman said in a prepared statement released today. "We believe that Simon is pursuing Taubman Centers because Simon lacks the ability to create its own meaningful growth opportunities and needs to improve its portfolio of aging and tired shopping centers by acquiring Taubman’s premier properties. We are not here to solve Simon’s problems, but rather are focused on maximizing the potential of our assets for the benefit of Taubman shareholders." According to Taubman, Simon’s offer is highly conditional and could raise antitrust concerns because a merger would give Simon control over key markets where it is already dominant.

Simon has also filed a formal lawsuit against the Taubman board challenging the Taubman family’s effective veto power over any change in control of the company. Simon hopes Michigan courts will invalidate the Preferred B shares that currently give Taubman family members control of the company. The Taubman family’s recent purchase of these shares allows it to hold 33.6 percent of voting shares with only a 1 percent economic stake in the company.

"The Simon lawsuit is a cynical attempt to turn a state anti-trust statute into a hostile takeover device," Bob Taubman said. "The Michigan statute was designed to stop opportunists like Simon. They are disingenuously trying to turn the law inside out. We are confident they will not succeed."

According to Morgan Stanley analyst Matthew Ostrower, Simon’s latest tact is to pressure Taubman’s independent directors to approve the deal. "Specifically, we think Simon would like to see Taubman’s board form an independent committee to consider the issue," he says. Independent Taubman board member S. Parker Gilbert, retired chairman of Morgan Stanley, is quoted in the Taubman statement as saying that the latest Simon bid does not reflect the underlying value of Taubman.

So what is a fair price for Taubman and how high will the price go if another bidding round ensues? Salomon Smith Barney predicts additional bids for Taubman could go as high as $20 per share. Morgan Stanley says $19 per share is a more likely conclusion. "Our $19 target price for Taubman is based on our belief that a potential combination of shareholder, board and legal pressures will eventually cause Taubman management to agree to sell the company," Morgan Stanley’s Ostrower says.

Banc of America Securities analyst Lee Schalop predicts Simon will fail. "We’re not M&A lawyers, but our best guess is that the deal won’t happen given: 1) the Taubman family’s opposition to the sale and its blocking position; 2) the 8.2% ownership limitation in the Taubman charter; and 3) the significant latitude that target companies have to frustrate a buyer’s wishes, regardless of the merits of a buyer’s offer," he wrote in a recent report on the negotiations.

Even if a future higher Simon bid is accepted by shareholders, Taubman’s charter could prevent Simon from obtaining more than 8 or 9 percent of the company’s shares, Ostrower says. "We would not be surprised to see Simon ask Taubman’s board to consider offering it an exemption to this rule and/or to challenge it in court."

Deutsche Bank analyst Louis Taylor says Simon will probably win a limited victory. "We believe there is a high probability that Simon will be successful in receiving a substantial number of Taubman’s shares. Absent any competing bid, we believe there is the potential that Simon could receive in excess of 50% of shares," he wrote in his report on the offer. Westfield, The Rouse Co. and General Growth Properties have all been mentioned by pundits as possible bidders for Taubman.

Morgan Stanley, Banc of America Securities and Deutsche Bank provide financial services to both Simon and Taubman.

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