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Simon's Retail Venture to Buy Brooks Brothers, Awaits Approval

A retail venture backed by mall owner Simon Property Group SPG and licensing firm Authentic Brands Group has agreed to acquire America’s oldest apparel company Brooks Brothers Inc. for $325 million.

This offer, which is up from the prior $305-million bid, is now subject to bankruptcy court approval and a hearing is scheduled for Aug 14. On satisfaction of all closing conditions, the transaction will likely be accomplished by the end of this month.

Per the agreement, the retail venture SPARC Group LLC has agreed to carry on operating at least 125 Brooks Brothers retail locations. Brooks Brothers, which had filed for bankruptcy last month, has 200 stores in North America.

Brooks Brothers had emerged as an iconic apparel retailer with more than two centuries in business and had earned its repute for dressing majority of the U.S. presidents. However, its bankruptcy filing was triggered by a drop in the company’s performance.

Particularly, transition toward casual office attire and online retailing were already hurting its business, while the pandemic further aggravated the company’s woes. Many of Brooks Brothers’ stores were shuttered and several of its employees furloughed. In fact, not only Brooks Brothers, but a number of retailers with apparel focus have been affected by the pandemic, with new clothing demand declining amid the remote working environment and social-distancing phase.

Banking on value-creating opportunities and purchase of bankrupt retailers has been on the agenda for Simon Property in recent years and the mall owner had earlier joined hands with Authentic Brands Group on such deals, including that of the teen chain Aéropostale as well as fashion retailer Forever 21.

Moreover, in its recent earnings call, Simon Property’s management had chalked out the gains of this purchase through SPARC Group, the company’s 50/50 joint venture with Authentic Brands Group. Per management, the purchase of Brooks Brothers out of bankruptcy would entail the acquisition of inventory at or below cost, buying of intellectual property at “attractive values”, reduction of “acquired companies overhead significantly” as well as ability to reject certain leases.

Simon Property enjoys market leadership with a rich history of generating strong cash flows and a decent liquidity position. The company exited second-quarter 2020 with $8.5 billion of liquidity. Following the quarter end, it accomplished a three-tranche senior notes offering aggregating $2 billion. With solid balance-sheet strength and available capital resources, the company is well poised to sail through the current crisis and capitalize on opportunities generating from market dislocations.

Nevertheless, the choppy environment in the retail real estate market will likely prevail with dwindling footfall at retail properties amid social-distancing mandates and higher e-commerce adoption. This will likely continue to hurt the performance of Simon Property and other retail REITs like Kimco Realty KIM and The Macerich Company MAC as well as Regency Centers Corporation’s REG. Hence, rent collections, occupancy and pricing power of Simon Property are likely to be affected in the near term.

Currently, Simon Property carries a Zacks Rank #4 (Sell). The company’s shares have declined 51.2% over the past six months, wider than its industry’s fall of 23%.

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