Now comes a prime example of central bank financial repression at work. It’s downright ugly and crystalizes how the Fed and other central banks are generating massive mis-allocations of capital and staggering windfall gains to Wall Street gamblers and their top 1% patrons.
In this case, the nation’s largest luxury mall operator, Simon Property Group (SPG), has announced a hostile offer for the other large US luxury mall operator, Macerich (MAC). Naturally, that made for “Merger Monday†cheerleading on CNBC, and a market surge well above the offer price—-indicating that the Wall Street arbs expect SPG’s offer to be fattened considerably before its all over.
The reason this kerfuffle is about financial repression and gambling games in the liquidity intoxicated Wall Street casino rather than an honest capital markets transaction is evident in a single number——namely, 56X. That’s the ratio you get when you divide the deal’s TEV by free cash flow—–and it represents a completely lunatic valuation.
So this warrants some elaboration. During the LTM period ending in September 2014, MAC posted EBITDA of $636 million and CapEx of $230 million, meaning that it generated $406 million of operating free cash flow. But SPG’s hostile offer at $91 per share plus assumption of existing debt results in a deal TEV (total enterprise value or debt plus market equity) of $22.4 billion.
Now here’s the thing. In an honest free market no one in their right mind would pay 56X cash flow for what amounts to a static portfolio of 52 Class A luxury malls and 6 strip malls.
The crucial point is that MAC is not an operating business with dynamic growth prospects owing to a red hot product, gee wiz technology or a world beating branding strategy with global markets to conquer. Instead, its just a dumb financial engineering portfolio which matches up a mountain of debt and REIT shares on one side of its balance sheet with a pile of long-term retail leases (10-20 years) at fixed rental rates on the other side. Its profits represent the arb between the two sides of its property balance sheet and these spreads are inherently fixed in nature.
Other than plowing the snow in the parking lot, operating the HVAC system in the mall and keeping the lights bright and the floors shiny,  mall REITS provides virtually no business value added. Their leasees sell Apple (AAPL) gadgets and Prada fashions, but as a business MAC and SPG are actually an anti-Apple enterprise. At best their organic operating income can creep forward a few percentage points a year, and even that would represent positive inflation in the periodic roll of their store leases.
