Dow Jones Newswire-Wall Street Journal | Shopping-mall owner
General Growth Properties Inc. has decided its preferred option for
exiting bankruptcy is a revised proposal led by Brookfield Asset
Management Inc. rather than a competing offer from rival mall giant
Simon Property Group Inc., a person familiar with the matter said. But
the situation is fluid and a few details remain to be ironed out Monday
before the deal can be finalized, a separate person familiar with the
talks said late Sunday.

The decision by General Growth’s board is the latest twist — but
perhaps not the final one — in months of competition between the
Brookfield group and Simon over which suitor would get the nod to
finance General Growth’s bankruptcy exit in exchange for much of the
company’s stock. General Growth, which owns 204 U.S. malls, sought
bankruptcy protection in April 2009 to restructure its $27 billion of
debt and intends to emerge later this year.

The situation may yet change again, as Simon and other investors that it has recruited are expected to review Brookfield’s proposal and perhaps submit another revised bid ahead of a pivotal hearing in the bankruptcy case set for Wednesday. Simon has said it remains interested in acquiring General Growth in its entirety if a deal can be struck.

Simon has pursued General Growth as something of an outsider, given that General Growth has talked with Brookfield about various deals since the months leading up to General Growth’s April 2009 bankruptcy. Some in the Simon camp have complained that General Growth seems determined not to do a deal with Simon because it is a competitor, even though Simon’s recapitalization offer is better than Brookfield’s on some points.

Simon, the largest U.S. mall owner with 321 properties, first contacted General Growth about a buyout in an informal meeting between executives last August, but General Growth decided it was too early in its bankruptcy case to pursue a deal. In February, Simon made a $10 billion buyout offer that General Growth rebuffed in favor of studying other options for financing its exit. Thereafter, Simon switched to trying to unseat Brookfield’s proposal to help finance General Growth’s bankruptcy exit as a standalone company.

The Brookfield group, which includes General Growth investors Pershing Square Capital Management LP and Fairholme Capital Management, has proposed to provide General Growth with $6.5 billion to pay its unsecured debts in exchange for two thirds of the company’s stock when it exits bankruptcy.

In exchange for its contributions, the Brookfield group required warrants to buy an additional 120 million General Growth shares. The value of those warrants is estimated at $500 million to $900 million.

The Brookfield deal now includes a few revisions, but the details of those revisions couldn’t be determined late Sunday.

Simon’s effort to trump Brookfield’s offer entailed matching it and recruiting other investors including Paulson & Co. to help it raise billions of dollars to finance General Growth’s exit. Simon proposed last month as its deal clincher that it would forego the warrants, gambling that the Brookfield camp would be unwilling to do so. Simon also made concessions like pledging to hold its voting stake in General Growth to 10% though it would own 25% of the shares.

General Growth, however, has been concerned about the ramifications of allowing Simon, a competitor, to own a large stake in the company. Brookfield, a Canadian property investor, owns considerable office properties in the U.S. but little retail property.

General Growth now faces a hearing on Wednesday – unless the date is again delayed – in which U.S. Bankruptcy Court Judge Allan Gropper is to determine whether the Brookfield proposal will get “stalking horse” status, making it the bid that others must top. The Brookfield’s proposal stipulates that Brookfield, Pershing and Fairholme start getting the warrants as soon as their bid is deemed the stalking horse.

For its part, Simon has said it will drop out of the bidding if it doesn’t win stalking-horse status instead of Brookfield. That’s partly because, once the Brookfield team gets its warrants, any subsequent acquirer of General Growth would be faced with paying the trio several hundred million dollars to retire those warrants. Thus, any further revised bid by Simon likely would be made prior to the Wednesday hearing.

If Simon drops out, General Growth will proceed with other aspects of the Brookfield plan once Judge Gropper has approved it. That includes arranging to raise more capital by selling additional shares to institutional investors, perhaps including some of those that had joined Simon’s bid.

Once General Growth exits bankruptcy, it plans to split into two companies. The larger company, which would retain the General Growth name, will own most of General Growth’s malls. The smaller entity would hold riskier assets such as General Growth’s residential-development business and a few malls worth less than their mortgage amounts.

The larger company still would carry nearly all of General Growth’s $20 billion of mortgages for which its malls are pledged as collateral.

Brookfield’s earlier proposal stipulated that Brookfield, Fairholme and Pershing were to receive several hundred million new General Growth shares, making them owners of two thirds of the company’s stock once it exits bankruptcy. The three also agreed previously to collectively provide up to $250 million to finance the smaller spin-off company.