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Simon, Brookfield in a Stand-Off in General Growth’s Reorganization

The bidding war between Simon Property Group and Brookfield Asset Management over the fate of General Growth Properties appears to have reached a stalemate, as the two firms are now offering similarly priced and structured reorganization plans for the bankrupt REIT. If neither firm raises its offer, General Growth’s decision will now come down to details such as the issuance of warrants and concerns over potential anti-trust objections, industry sources say.

On Thursday, Simon executives met with General Growth’s board of directors to outline Simon’s new bid. According to the terms of its revised plan, Simon would match Brookfield Asset Management’s proposed $15 price per share and would also backstop a $1.5 billion credit facility to allow General Growth to emerge from bankruptcy protection.

To quell concerns that a large stake in its main rival in the U.S. regional mall sector would give Simon too much sway in negotiations with retailers, the Indianapolis-based REIT also offered to cap its voting rights at 20 percent and limit its appointments to General Growth’s board of director to two members. (Brookfield’s reorganization plan would allow it to appoint three of the board’s nine members). In addition, it will forego asking for any warrants to acquire future shares. Brookfield’s offer calls for the issuance of 120 million warrants to itself and its co-investors, Fairholme Capital Management and Pershing Square Capital Management.

In addition to $2.5 billion Simon would put into the recapitalization, the firm has secured additional commitments totaling $2.1 billion from private partners, including ING Clarion Real Estate Securities, Oak Hill Advisors, RREEF, Taconic Capital Advisors and Paulson & Co., to finance the new plan.

Simon and Brookfield are currently jockeying for the position of stalking horse bidder in General Growth’s reorganization. The bidder was scheduled to be selected at an Apr. 29 court hearing, but the court postponed the decision until May 4 to give General Growth more time to mull the offers. General Growth previously favored Brookfield’s reorganization plan, as it offered a higher value to its shareholders and would allow the REIT to remain an independent entity. Simon’s prior bid would have resulted in an outright acquisition at a price of about $10 per share.

But with Simon and Brookfield now offering very similar plans, General Growth’s decision will be dictated partly by the likelihood that a deal with Simon would attract the attention of the Federal Trade Commission (FTC), according to Todd Sullivan, a Massachusetts-based investor and author of the Value Plays blog. The transaction would leave Simon with ownership interest in about 30 percent of the country’s regional malls and might spur an investigation by the FTC, which will likely prolong General Growth’s emergence from Chapter 11, even if the FTC ultimately decides there is no monopoly.

“It’s a big issue, especially for a company going out of Chapter 11,” says Sullivan. “It can delay the vote and a lot of legal things can happen that can prolong the Chapter 11 process. The FTC is much more aggressive than it’s been in the past and that transaction [is] high profile. I think the judge is going to look at that.”

Proponents of the Simon bid, including RBC Capital Markets analyst Rich Moore, say the FTC tends to pay little attention to mergers and acquisitions in the commercial real estate arena because it is so large and would be unlikely to draw a distinction between shopping center operators and regional mall operators.

Simon, primarily a regional mall operator, currently owns 382 properties, or 245 million square feet of GLA domestically. General Growth, its main rival, owns 246 properties, or 182 million square feet of GLA. There is a total of 7.2 billion square feet of retail GLA in the U.S., according to the CoStar Group, a Bethesda, Md.-based research firm. Against that figure, Simon’s and General Growth’s combined holdings look like a drop in a bucket, Moore says. “This would be sort of a new ground for a lawsuit and it probably won’t happen,” he notes.

From the perspective of just looking at regional malls, a combination of Simon and General Growth would control about 30 percent of the market.

What should be a bigger concern to General Growth is the 120 million warrants it would have to issue to Brookfield and its partners if the latter’s reorganization plan becomes the stalking horse bid, according to Moore. The warrants would require General Growth to pay Brookfield between $500 million and $900 million if another firm outbids it, negating the value of the higher bid to General Growth shareholders.

Simon’s best hope of coming out on top would be to play on the warrants issue (Simon’s plan calls for no warrants) and raise its bid by several dollars, to $18 or $19 per share, says Sullivan. At the moment, however, neither Simon nor Brookfield appears ready to raise the stakes. Brookfield stands to benefit from its warrants, while Simon might not be able to gather additional commitments from private sector partners to significantly raise its bid.

“I don’t think Simon would go higher than they have to and I don’t think Brookfield would go much higher,” says Moore. “Maybe [they’ll raise the bid] by a few dollars at most.”

—Elaine Misonzhnik

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