Chelsea, Simon Sign Merger Agreement

INDIANAPOLIS-Mall developer Simon Property Group and outlet center developer Chelsea Property Group have agreed to a merger whereby Simon would acquire Chelsea in a transaction valued at $3.5 billion for Chelsea ($66 per share for all of Chelsea’s outstanding common stock and units). Simon also would assume Chelsea’s existing indebtedness and preferred stock, which totaled approximately $1.3 billion as of the end of March. Chelsea shareholders will vote on the merger in the next 30 days or so; a vote of Simon shareholders is not required. The merger is scheduled to close early in the fourth quarter.Indianapolis-based Simon owns or has an interest in 247 mall properties in North America and 48 assets in Europe (in France, Italy, Poland and Portugal). Roseland, NJ-based Chelsea Property Group develops, owns and manages “Premium Outlet” centers in the US and Asia. Chelsea’s portfolio includes 31 centers in the US and four in Japan, each located in major metropolitan markets or tourist destinations such. As of the end of March, the Chelsea US portfolio was 98% occupied and generated sales per sf of $404. Chelsea’s four Japan properties are fully leased and generated average sales of more than $800 per sf. The two companies previously have worked together on three projects, in Orlando, Las Vegas and Chicago.If the acquisition goes through, Chelsea will be managed as a division of Simon and will continue to be headquartered in Roseland, with Chelsea chairman/CEO David Bloom and the existing Chelsea management team continuing in their current roles. Bloom also will join the Simon Property Group Board as an Advisory Director. In today’s conference call regarding the merger, executives said there are agreements that will keep Bloom and three other top managers from Chelsea in the merged organization through the end of 2006, and that there is no expected reduction in headcount at Chelsea’s headquarters as a result of the merger.Under terms of the agreement approved by the directors of both companies, Simon will pay $66 per share for all of Chelsea’s outstanding common stock and units, which is a 13% premium to Chelsea’s closing price on Friday. The consideration to Chelsea’s common shareholders comprises $36.00 in cash; $15 of SPG common stock, based on a fixed conversion ratio of 0.2936 per Chelsea common share; and $15 of a new issue of SPG convertible preferred stock. The new series of convertible preferred shares yield 6%, have a liquidation preference of $50 per share and are convertible into SPG common stock at $63.86 per share, with a contingent conversion feature of an additional 25%. This will be a taxable transaction to Chelsea common shareholders. Chelsea unitholders will receive 100% of their consideration in equity, equally split between Simon common units and convertible preferred units. The Chelsea operating partnership, CPG Partners LP, will become a wholly-owned subsidiary of the Simon operating partnership, Simon Property Group LP.Simon expects to fund the cash portion of the transaction on an interim basis with a $1.8 billion acquisition facility. In the conference call, company executives said the interest rate on the loan is 65 points over LIBOR. Simon expects an initial year un-levered yield of 7.2% from the transaction, and expects the transaction to be at least $0.09 per share accretive to 2005 Funds from Operations and $0.18 accretive to 2006 FFO. Simon was advised in this transaction by UBS Investment Bank, who rendered a fairness opinion to the Simon Board of Directors, and by Morgan Stanley. Chelsea was advised by Merrill Lynch & Co., who rendered a fairness opinion to the Chelsea Board of Directors.In the conference call, executives of the companies said the merger would likely mean and accelerated development schedule for Chelsea, which already has been growing FFO at 15% per year. Additionally, executives said asset sales by either company will not increase as a result of the merger and that no specifics have been hammered out with regard to coordinated growth internationally.With Chelsea’s portfolio already 98% leased, company executives said growth would come from accelerated development and ancillary revenue- generating programs that Simon employs that can be picked up by Chelsea, such as the renting of carts and kiosks. As well, executives said Simon’s portfolio of developable land could also benefit Chelsea because some of the properties may be better suited for an outlet mall than a traditional mall.