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Simon's J.C. Penney deal defensive, but potentially very profitable analysts from SNL Real Estate Daily Simon's J.C. Penney deal defensive, but potentially very profitable analystsByline: Tom Yeatts Simon Property Group Inc. is making another astute, and potentially very profitable, play in the fraught retail arena by looking to buy J. C. Penney Co. Inc. out of bankruptcy, analysts said. With the still-pending deal, Simon, along with partner Brookfield Property Partners LP the "stalking horse" bidder in the Plano, Texas-headquartered department store's ongoing bankruptcy case are fending off potential co-tenancy issues at a time of dramatic upheaval in the retail landscape that has yielded numerous retailer bankruptcies and store closures, Alex Arnold, managing director and analyst at Odeon Capital Group, told S&P Global Market Intelligence. The closure of a major mall anchor and J.C. Penney is one of Simon's largest tenants by square footage could trigger clauses in other tenants' leases allowing those tenants to pay a percentage of rent or even abandon a lease. "For them, there's a little bit of chess going on," Arnold said of Simon. "They've got tremendous access to capital ... and they've proven that they've been able to do that [buy struggling retailers]. And they're solving a problem for themselves. Brookfield is the same case." Arnold and other analysts do not expect a competing bid to enter the picture given current market conditions, the declining profitability of department stores and the complexity of the transaction. Simon Property Group and Brookfield are experienced operators and the bankruptcy court would likely favor the pair even if a bid were to emerge from a prominent private equity player, they said. Survival and recovery? Analysts also expect Simon and Brookfield to keep J.C. Penney alive should the deal be approved, at least for the near term. While the department store has struggled for years with declining profitability, and some question the long-term viability of the brand and the department store model, generally J.C. Penney CEO Jill Soltau had made strides reviving its operations and customer base before being waylaid by the pandemic, they said. Because Simon and Brookfield would be acquiring J.C. Penney so cheaply, they could quickly recoup their initial investment. J.C. Penney would be the fourth retailer Simon acquired this year, after Forever 21, Brooks Brothers and Lucky Brand. It would be its first department store acquisition. Mizuho Securities USA analyst Haendel St. Juste framed the deal primarily as a defensive play that will allow the company to control valuable real estate. No matter how profitable the company's retailer acquisitions have turned out to be, past results do not dictate future performance, he said. "[T]he operating environment today is significantly more challenging than in 2016, the size of the company/turnaround involved more challenging, and the stakes even higher," St. Juste said in a research note. If any party can fix and revive J.C. Penney's operations in current market conditions, it's Simon and Brookfield, according to Vasant Jain, founder and CEO of Alphabridge Group, a corporate finance and strategy consulting firm based in Vancouver, Canada. "Even though it's in a bankrupt state and the stock is trading at pennies, it's still a $10 billion company from a sales standpoint," Jain said of J.C. Penney in an interview. "And if you can pay $300 million to control $11 billion worth of sales, why wouldn't you do it?" BTIG analyst James Sullivan said Simon likely is working with "house money" funds recouped from earlier investments in retailers like its acquisition of Aeropostale, which he described as a "very successful" transaction. Simon is smart to place itself in the driver's seat for decision-making around one of its largest tenants by square footage, he said. "Even if J.C. Penney doesn't survive, with the pace and the rate of closures, it might be a little bit better for Simon to be an owner of J.C. Penney than to be on the other side of the table," Sullivan said. J.C. Penney intends to seek court approval for the deal in early October. If the bankruptcy court approves the takeover deal, the department will have ample working capital and inventory going into the holidays, Sullivan said. "It will be, presumably, coming out of this in time for what is hopefully a round of store openings and some kind of holiday season," he said. "Who knows what it is going to be like this year." |
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