Simon Property to Buy Prime Outlets for $2.33 Billion

Dec. 8 (Bloomberg) -- Simon Property Group Inc., the largest U.S. shopping mall owner, made its biggest purchase in five years with an agreement to buy Prime Outlets Acquisition Co. from Lightstone Group for $2.33 billion including debt.

The deal gives Indianapolis-based Simon Property an additional 22 retail outlet centers, increasing its total to more than 60. It will pay $700 million for closely held Prime Outlets, 80 percent in cash and 20 percent in common operating partnership units, Simon Property said in a statement.

Chief Executive Officer David Simon amassed about $3.7 billion in cash in the past year to fund acquisitions and last month hired Lazard Ltd. to consider purchasing the assets of mall owner General Growth Properties Inc. In an interview in March, Simon said he wanted to “hoard” cash to take advantage of opportunities in the market.

“It’s a good deal,” said Alexander Goldfarb, an analyst at Sandler O’Neill & Partners LP, who has a “buy” rating on Simon Property shares. “Simon’s done a good job with Chelsea, and this makes sense. It just fits well within the outlet portfolio.”

Simon Property acquired Chelsea Property Group Inc. in 2004 for $3.5 billion in cash and stock, giving it retail outlets including Woodbury Common, near New York City. As of Sept. 30, Simon Property owned 325 properties in the U.S., including 41 outlet centers.

Designer Merchandise

Prime Outlets, based in Baltimore, owns outlets in metropolitan areas including Washington D.C., Baltimore, San Antonio and Orlando. The centers were 92 percent occupied as of June 30 and generated sales of about $370 a square foot. Outlet centers sell designer merchandise at discount prices. Almost all of Prime Outlets is owned by Lightstone Group, a closely held real estate investor founded by David Lichtenstein, and Lightstone Value Plus Real Estate Investment Trust.

“Prime Outlets is an excellent opportunity for Simon as it represents a strong strategic fit for our existing premium outlet portfolio and enhances our leadership position in the outlet business,” David Simon said in a statement. “Following the completion of this transaction our outlet portfolio will have 63 centers comprising approximately 25 million square feet.”

Simon Property’s outlet centers had annual sales of $492 per square foot as of Sept. 30, more than the $438 per foot at its regional malls. The company’s outlet centers also had higher occupancies, at 97.5 percent, compared with 91.4 percent at regional malls.

$25 Billion

The company has completed $25 billion in mergers and acquisition transactions since the company went public in 1993, Simon said in a Sept. 15 interview with Bloomberg Television.

“We’re focused on quality retail real estate, so it’s more than just malls,” he said. “It could be outlets. It could be international opportunities.”

The CEO is expanding amid signs that the economy is starting to mend. More than half of North American consumers said they plan to increase spending once economic prospects improve, after cutting back over the past year, according to an International Council of Shopping Centers survey issued yesterday.

Shares of Simon Property rose $1.30, or 1.8 percent, to $75.20 at 12:16 p.m. in New York Stock Exchange composite trading. The stock is up 36 percent in the 12 months through yesterday.

Existing Capital

Simon Property said it intends to fund the cash portion of the deal with existing capital. Simon Property was advised by UBS AG and JPMorgan Chase & Co. and was represented by Fried, Frank, Harris, Shriver & Jacobson LLP. The company may complete the transaction in the first or second quarter of next year.

Prime Outlets was advised by Citigroup Global Markets and Paul, Weiss, Rifkind, Wharton & Garrison LLP.

The value of Simon Property’s operating units will be based on the 10-day trading average of Simon Property common stock before the closing of the deal, subject to a 10 percent collar, the company said.

Les Morris, a spokesman for Simon Property, declined to comment today.

Simon Property may have purchased Prime Outlets after being thwarted in an effort to purchase General Growth assets. General Growth President Thomas Nolan said in a Dec. 2 interview that his company would likely emerge from bankruptcy without selling its most prized shopping malls.

Designer Names

Prime Outlet centers feature designer merchandise from Gucci, Giorgio Armani, Burberry, Kate Spade, Michael Kors, St. John and Juicy Couture, according to its Web site. The centers also include stores from Saks Fifth Avenue Off 5th and Neiman Marcus Last Call.

Its largest centers are in Orlando, with more than 773,000 square feet, and Birch Run, Michigan, with 681,000 square feet. The company is developing 1 million square feet of new centers and plans to expand to San Francisco and Dallas/Fort Worth, according to its Web site.

Lightstone, based in New York, bought Extended Stay Hotels Inc. for $8 billion in 2007, using mostly borrowed money. Extended Stay filed for Chapter 11 bankruptcy reorganization in June with $7.6 billion in debt. Lightstone bought Prime Retail in 2003, paying $115 million in cash plus the assumption of $523 million in debt. Lightstone owned retail centers in 12 U.S. states before the Prime purchase.

“I am very proud of the company we were able to build over the past seven years and equally delighted that we were able to sell Prime to a world-class company like Simon,” Lichtenstein, Lightstone’s chief executive officer, said in a statement.