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America’s largest shopping mall owner is buying up its tenants

Mall operator Simon Property Group has a problem.

The commercial real estate group has been swimming against a steady tide of retail bankruptcies as the coronavirus crisis presents even more of a difficult challenge to brick-and-mortar establishments than the 2008 financial meltdown. 

Simon’s balance sheet is in better shape than distressed peers, such as CBL, a Tennessee-based mall owner which estimated that it had collected only 49 per cent of July rents and said on Wednesday it planned to file for bankruptcy, or Washington Prime, an Ohio-based mall operator that accumulated a debt burden of $3.1bn as of last year.

Even so, three of Simon’s top occupants have filed for Chapter 11 bankruptcy, while its largest, Macy’s, faces widespread store closures. The embattled Victoria’s Secret owner L Brands is recovering from a derailed deal with Sycamore Partners

Even as storefronts re-emerge from lockdown, many are unable or unwilling to pay rent. Consumers are flocking to ecommerce. 

It doesn’t help that, even after wooing crowd favourites like Apple and Sephora to move in, most of Simon’s retail tenants have been losing favour among consumers since before the Great Recession. 

As the retail sector faces a reckoning, Simon has employed a unique strategy: buying up its tenants.

Bar chart of Anchor and in-line tenants by sq ft (m) showing Struggling and bankrupt chains among Simon's biggest tenants

With the help of a unit of Brookfield and the BlackRock-backed Authentic Brands, the company has swooped in to rescue ailing mallscape fixtures from Chapter 11 bankruptcy in a series of unconventional deals including Lucky Brand, Aéropostale, Forever 21, and most recently, Brooks Brothers.

Simon chairman and chief executive David Simon, son of co-founder Mel Simon, says the series of investments allowed the company to buy retailers’ merchandise, brand value and other assets at a bargain. “It’s a sideline business,” he stated, adding that the group’s spend on recent acquisitions amounts to a small proportion of its near-$21bn market capitalisation.

Critics have argued that becoming its own tenant is a strategic move by Simon to keep its properties from becoming ghost towns as its occupancy rates hit their lowest levels in a decade.

Line chart of Occupancy rate (%) showing More units lie vacant in Simon properties

Others are more open to Simon disrupting the status quo. “[They have] a better chance of success than private equity, which has an absolutely abysmal track record in retail,” GlobalData’s retail managing director Neil Saunders told the FT.

Unorthodox dealmaking as it may be, Simon is continuing to make a name for itself in M&A. 

The group is teaming up with Brookfield in an attempt to resurrect its second-largest tenant JCPenny from bankruptcy, as reported by The Wall Street Journal.

One thing to watch is whether the landlord-turned-dealmaker can revive its newest portfolio additions. On his doubters, the Simon boss noted, “[they’re] probably the same people that told Amazon to stay in the book business”.

Another twist in JAB’s hectic year

JAB Holdings, the acquisitive consumer industry group, is having a hectic 2020 in parts of its portfolio. 

Coronavirus hit its fast-casual chains Pret A Manger and Panera Bread; US foods group Mars sued them over claims a former executive stole secret company documents to benefit JAB; and their problem-plagued cosmetics group Coty has continued to see its performance falter.

Now DD’s JAB watchers, Arash Massoudi and Leila Abboud, report that an executive recruited to the group just last year is out after tensions with Peter Harf, pictured, one of JAB’s two managing partners.

Harf hired David Kamenetzky, formerly of Anheuser-Busch InBev, to help represent the interests of its main backer, Germany’s billionaire Reimann family.

Kamenetzky also had the delicate role of managing the Reimann family’s philanthropic foundation after revelations that the family patriarch was an early and enthusiastic supporter of the Nazi party in Germany and used slave labour during the second world war.

Over time, it was expected that Kamenetzky would become the family confidant when Harf, 74, stepped away from the business. 

This is not the first bust-up involving senior executives. Last year, Harf and Olivier Goudet, the other JAB managing partner, parted ways with Bart Becht, pictured, the other top executive at the group, over a difference in strategy. 

Harf, the longstanding Reimann consigliere, has undoubtedly been the force behind the success of JAB over the years. But there will be growing pressure to answer questions over succession and governance at JAB in the months to come. 

Sticky wicket: Indian cricket league caught in India-China tech war

The Indian Premier League, the 12-year-old cricket tournament that has brought renewed energy and investment into the sport, will take place next month in the United Arab Emirates.

Yet the League sparked outrage in India over its use of Chinese sponsors, the result of a movement to purge India of Chinese money after a deadly border clash between the two neighbours in June.

The uproar has forced the IPL to part ways with one of its main sponsors, Chinese smartphone maker Vivo. With only a month to go, it quickly brought in a replacement at a steep discount: Dream11, a fantasy sports platform.

Dream11 will pay half of Vivo’s original Rs4.4bn ($59m) for the season, an unwelcome financial hit at a time when the pandemic is already weighing on sponsorship and advertising revenues.

The irony wasn’t lost on anyone. One of Dream11’s most important investors is Chinese internet group Tencent, underscoring just how integral Chinese capital has become for many Indian start-ups.

Dream11’s chief executive Harsh Jain tried to draw a line under the issue, calling his company “a proud homegrown Indian brand that is made in India, by Indians and exclusively for Indian sports fans”. 

Whether that will assuage the league’s critics remains to be seen.

Job moves

  • Charlotte Valeur has stepped down as chair of the Institute of Directors, the organisation’s second high-profile resignation from the role in two-and-a-half years. Get the full story.

  • Outgoing World Trade Organization director-general Roberto Azevêdo was named PepsiCo’s new chief corporate affairs officer. More here.

  • Barclays hired Kieran Doran as a managing director in its aerospace and defense investment banking arm. He joins from a similar role at Rothschild & Co.

Smart reads 

Playing the system Robinhood reinvented trading for the video-gaming generation of young inexperienced investors, toppling big retail brokerage groups as they near a rumoured IPO. But the app’s business model, built on pawning data to Wall Street sharks, is less favourable to the little guy than it leads on. (Forbes)

Poor connection US activists, who attend annual shareholder meetings to grill corporate executives, have felt silenced as events are moved online and questions seem to get lost in the digital queue. (Reuters)

Too close for comfort Billionaire Lex Greensill’s handling of an $800m SoftBank Vision Fund investment has drawn scrutiny from German regulators, according to Bloomberg. Most of the money travelled through his eponymous Greensill bank to assets tied to Sanjeev Gupta, the industrialist who’s grabbed headlines for unconventional financing. (Bloomberg)

News round-up

Johnson & Johnson to buy biotech Momenta in $6.5bn deal (FT) 

Airbnb files for initial public offering (FT)

Citigroup wins freeze on funds mistakenly sent to Revlon creditors (Reuters)

Dufry to buy rest of Hudson unit in $311 million deal (Reuters)

Takeda to sell OTC drug unit to Blackstone for $2.3bn (Nikkei Asian Review + Lex)

Apple market value hits $2tn (FT)

China’s Pinduoduo clashes with Tesla over heavily discounted car offers (FT)

Casper Sleep’s CEO Krim Files for $300 million blank-check IPO (BBG)

KBR agrees to acquire defense firm Centauri for $800 million (BBG)

Bill Foley Raises $1.3 Billion for Blank-Check Company (BBG)

Due Diligence is written by Arash Massoudi, Kaye Wiggins and Robert Smith in London, Javier Espinoza in Brussels, James Fontanella-Khan, Ortenca Aliaj, Sujeet Indap, Eric Platt, Mark Vandevelde and Francesca Friday in New York and Miles Kruppa in San Francisco. Please send feedback to due.diligence@ft.com

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