General Growth, owner of Water Tower Place, filed for Chapter 11 bankruptcy protection in April. (Alex Garcia/Chicago Tribune)

By Sandra M. Jones |
General Growth Properties Inc. said it plans to split itself into two
companies with the help of $2.625 billion in funding from Brookfield
Asset Management Inc., setting off a bidding war for the nation’s
second largest mall operator.

The plan, which requires a bankruptcy judge’s approval, would give
equity holders in the mall operator $15 a share for stakes in the two
companies–essentially a “good” company that holds about 200
shopping centers and a “bad” company that holds General Growth’s
riskier investments. Unsecured creditors would be paid in full with
interest.

The complex plan follows an unsolicited $10 billion bid last week from rival Simon Property Group Inc., the nation’s largest shopping center company. That plan, which General Growth deemed as having too low a value, would likewise pay unsecured creditors in full and give shareholders $9 a share.

General Growth described Brookfield’s funding as a “cornerstone investment” that would give the Chicago-based mall operator the support needed to raise up to another $5.8 billion.  The additional capital would come from in large part issuing new shares, combined with selling about $1 billion in assets and raising a $1.5 billion in new debt.

A chief difference between the two bids, aside from the price, is that Simon is offering mostly cash while General Growth’s plan relies on selling new stock. Both offers put something on the table for shareholders. In most Chapter 11 reorganizations, once the creditors get paid–who under the law are first in line–there is nothing left for shareholders.

Analysts expect to see a higher offer from Indianapolis-based Simon Property, which has been reported to be talking to private equity groups about participating in a deal. Simon
Property, for its part, issued a statement late Wednesday calling its mostly
cash bid “far superior” and describing General Growth’s plan to raise another
$5.8 billion as “highly speculative.”

“General
Growth’s proposed recapitalization amounts to a risky equity play on the backs
of its unsecured creditors,” Simon said in a press release.  ”Simon is
providing $10 billion of real value — $3 billion to shareholders as well as $7
billion to creditors — as compared to a complex piece of financial engineering
that is so highly conditional as to be illusory.”

In the meantime, General Growth is positioning its plan as a so-called stalking horse bid, a term used in bankruptcy court auctions to describe the initial bid that sets a minimum price for other offers. The Brookfield-sponsored recapitalization “provides a strong financial foundation for the future,” said General Growth CEO Adam Metz.

Under the terms of General Growth’s plan, Toronto-based Brookfield would own about 30 percent of General Growth and have the right to nominate three of the reorganized company’s nine directors.

General Growth shareholders would receive one new General Growth share worth $10 plus one share in a smaller company called General Growth Opportunities with an initial value of $5. The smaller company would contain the master planned communities division, which is essentially land available to housing developers. It would also hold the company’s headquarters at 110 N. Wacker Dr. in Chicago, South Street Seaport in Manhattan, and about 20  troubled malls, many of which are worth less than their mortgages.

In addition, Brookfield will be granted seven-year warrants to purchase 60 million shares of existing General Growth stock at an exercise price of $15 a share. Until the bankruptcy court approves the warrants, William Ackman’s hedge fund Pershing Square Capital Management has stepped in to provide what is essentially a breakup fee for Brookfield if General Growth ends up being sold to another party for more than $12.75 a share.

That fee would be equal to 25 percent of Pershing Square’s profits from its investments in General Growth, and General Growth would not be required to reimburse Pershing Square, the companies said. Pershing Square holds a 25 percent economic interest in General Growth through a 7.5 percent equity stake and other financial instruments.

On March 3, the bankruptcy court is schedule to decide if General Growth can have another six months to reorganize, a period known as exclusivity. Once exclusivity ends, outsiders including creditors can put forth their plans.

General Growth, owner of Water Tower Place and Northbrook Court, filed for Chapter 11 bankruptcy protection in April, toppling under the weight of $27 billion in debt from an acquisition-spree. It was the largest real-estate bankruptcy in U.S. history.

General Growth shares rose 0.6 percent to $12.89 after rising as high as $13.86 earlier in the day. Shares traded as low as 31 cents in March 2009 before the company went into bankruptcy.