Any hopes that Simon Property Group executives had that they could force a quick resolution to the General Growth saga have been doused now that the Chicago-based REIT has shown it is not going to be pushed over without a fight.
Yesterday’s announcement of a $8.3 billion recapitalization plan that includes a $2.63 billion equity commitment from Canadian firm Brookfield Asset Management, along with a scheme to split General Growth in two, has created a $15 per share value floor for the REIT. That, in turn, could force Simon to sweeten its $9 per share offer or at the very least work even harder to prove to General Growth’s shareholders, creditors and the bankruptcy court that its offer is truly superior. In addition, the bidding may get even more complicated with news that Australian limited property trust Westfield Group, like Simon, has signed a non-disclosure agreement with General Growth Properties and could be prepping its own bid. (The non-disclosure agreements allow both Simon and Westfield to talk with potential joint venture partners.)
When Simon initially made its offer public, about a week ago, the firm seemed to be putting pressure on General Growth through its unsecured creditors, according to Jennifer Tullius, partner with Raines Law Group LLP, a Beverly Hills, Calif.-based law firm. The terms of the deal would enable those creditors to be paid back in full in cash rather than having to wait or taking equity positions in exchange for their bonds. In this regard, some observers still view Simon’s offer as superior, despite the lower valuation per share. According to the Brookfield plan, creditors will be made whole, but the firm will need to raise additional cash in order to do so, possibly by issuing more equity. That potential dilution is one of the points that Simon has honed in on in criticizing the proposal.
However, in the view of Todd Sullivan, a Massachusetts-based investor and author of the Value Plays blog, the plan put forth by General Growth, which would allow Brookfield Asset Management to buy its shares at $15 apiece, is bound to be much more popular with the shareholders, who might have more power in this bankruptcy proceeding than is traditionally the case. The reorganization plan calls for GGP’s existing shareholders to receive one share of new GGP common stock with an initial value of $10.00 per share, plus one share of a new firm, General Growth Opportunities, with an initial value of $5.00 per share.
“What most people are missing is this is one of those bankruptcies where shareholders control the process,” Sullivan says. “Playing to the unsecured lenders will look good in the newspaper, but when it comes to the court, the court will ask if they are getting paid in full [under either plan] and if the answer is yes, the court will look to shareholders. I think for current shareholders, it’s a great plan. If the company is simply sold, their upside is limited to the sales price. Splitting the company into two allows them participation in the future of the company.”
The Brookfield plan also has the benefit of needing no further due diligence or financing conditions. The plan, however, is subject to court approval and could still be trumped by a higher or better offer. Cedrik Lachance, senior analyst with Green Street Advisors, called the plan “a credible alternative to what’s been submitted by Simon so far and it’s a way to create a bidding environment in which there are two parties bidding for the assets, which is likely to maximize shareholder value.”
The scheme to split the company into two parts—one holding the majority of its high-quality malls and the other holding riskier retail assets as well as General Growth’s master planned communities and some non-retail assets—may also face scrutiny. How the judge will view the split will depend in large part on whether the split and the equity infusion from Brookfield would offer a quick and full resolution to the bankruptcy process, notes Jon Southard, principal and director of forecasting with CBRE Econometric Advisors, a Boston-based research firm.
In order to make the plan viable, General Growth would have to find investors willing to bet on the riskier portion of its assets—“you still have to figure out who’s going to take the second piece,” Southard says, adding that a similar scheme did not work out for investment bank Lehman Brothers. In Tullius’ experience, bankruptcy courts tend to favor foolproof reorganization plans over those they deem to be more uncertain, even if the latter appears more attractive.
But with Brookfield’s commitment and with Westfield’s entry into the picture, General Growth will certainly be in a better position to fend off Simon’s hostile takeover attempts, according to Sullivan. He notes that the judge in charge of General Growth’s bankruptcy case appears to want as quick a resolution as possible and will likely grant the REIT an extension of its exclusivity period at next week’s hearing.
“If he would deny their motion, he would throw the current state of affairs into chaos, with offers coming in from every corner and the process would extend by a year,” Sullivan says. “And he has expressed no desire to do that. So maybe he doesn’t give them another six months, but he will give them three months.”
In addition, the U.S. Bankruptcy Judge Allan Gropper so far has seemed to lean in favor of General Growth operating as one entity, according to Lachance. “But when it comes down to realizing shareholder value and realizing value for all parties involved, that’s really difficult to see” what he would prefer, he said.