Mall owners Simon, DeBartolo to merge Union will create largest real estate firm in North America

$1.5 billion stock deal

New group will own 6 malls, centers in Baltimore-D.C. area

Retailing

March 27, 1996|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Retail mall giants Simon Property Group Inc. and the DeBartolo Realty Corp. yesterday announced a corporate marriage that will create North America's largest real estate concern, with a market capitalization of $7.5 billion.

Together, Simon and DeBartolo will own 183 retail projects containing 110 million square feet, more than twice the amount of retail space in the Baltimore metropolitan area, according to statistics compiled by real estate firm KLNB Inc.

The $1.5 billion stock merger also will make the Simon DeBartolo Group, as the new entity will be known, the nation's largest real estate investment trust (REIT). Combined, Simon DeBartolo had 1995 revenues of $886 million.

"This is an unprecedented transaction for the real estate industry," said David Simon, president and chief executive of Simon Property Group and the future CEO of Simon DeBartolo.

"We are combining two of the most recognized names in the retail real estate business into an organization of unparalleled size, talent and financial resources."

In the Baltimore-Washington area, Simon DeBartolo will own six regional malls and community shopping centers totaling 3.92 million square feet, including the Golden Ring Mall, Glen Burnie Mall, St. Charles Towne Center and Towne Plaza in Waldorf and the Fashion Centre in Pentagon City, Va.

With its huge size -- Simon DeBartolo projects last year generated more than $16 billion in sales -- the combined company is expected garner considerable power in negotiating with department stores and national retail tenants, according to analysts and institutional stockholders.

Simon intends to complete the transaction by summer by paying DeBartolo stockholders 68 percent of a Simon share for each of DeBartolo's 89.6 million outstanding shares.

"DeBartolo has embarked on an aggressive capital improvement campaign, and this merger will provide them a lower cost of capital to complete that," said Michael L. Mead, a Legg Mason Wood Walker Inc. analyst who tracks both companies. "On the Simon side, this provides an excellent opportunity to grow both internally and externally."

The merger of the two REITs also comes amid sagging retail sales in general and slumping mall receipts in particular, a five-year trend that is causing various mall owners to diversify or consolidate.

At the Rouse Co., a Simon and DeBartolo competitor, the Columbia-based mall owner reacted to the phenomenon last month by announcing plans to acquire the Howard Hughes Corp. of Las Vegas, a $520 million purchase that will provide geographic and product diversification.

"There is no doubt that their size will give them increased clout with department stores and other tenants," said David L. Tripp, a Rouse vice president.

"Fundamentally, however, they operate from a different philosophy than we do. We prefer projects that are A-tier properties or have that potential. I think their objective is to be big is to be good."

Projects in 32 states

The Simon and DeBartolo merger will also create some geographic diversification, since they rarekt operate in the same markets. In all, Simon DeBartolo will own projects in 32 states.

"Simon is a very innovative, good operator of retail properties, and this merger can potentially take them to the next level," said David M. Lee, an investment analyst with T. Rowe Price Associates Inc., whose funds own 4.8 million shares -- more than 2.5 percent -- of each of the two separate companies.

"And for DeBartolo shareholders, this provides an opportunity to realize value," Mr. Lee said.

Simon also plans to absorb $1.5 billion of DeBartolo's debt, raising its total debt level to $3.4 billion.

As part of the deal, Simon DeBartolo hopes to cut its $91 million annual overhead by at least 10 percent.

"They should have excellent opportunities for cost savings," Mr. Mead said.

For the REIT industry, the Simon and DeBartolo combination represents the first major event in what is expected to be a flood of mergers.

"This is a very significant moment in the life of the REIT industry," said Mark O. Decker, president of the National Association of Real Estate Investment Trusts, a trade group based in Washington.

"It's a huge signal to other companies that says two healthy companies can be better as one. It creates visibility and credibility for the industry."

Pub Date: 3/27/96

Simon, DeBartolo at a glance

.................... Simon Property Group ....... DeBartolo Realty Corp.

Headquarters ....... Indianapolis ............... Youngstown, Ohio

Employees .......... 4,100 ...................... 3,900

Properties ......... Interests in ............... 61 malls and

.................... 122 projects ............... shopping centers

Sq. footage ........ 62 million ................. 48 million

FY '95 revenues .... $553.7 million ............. $332.7 million

Yesterday's

stock price ........ $23.625 (-37.5 cents) ...... $15.375 (+75 cents)

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