Dow Jones Newswires-Wall Street Journal | A bankruptcy judge on
Friday approved as mall owner General Growth Properties Inc.’s
preferred option for exiting bankruptcy a $6.5 billion recapitalization
offer from Brookfield Asset Management Inc., causing rival suitor Simon
Property Group Inc. to declare it will no longer participate in the
bidding.
U.S. Bankruptcy Judge Allan Gropper approved the Brookfield offer as
the “stalking horse” bid in General Growth’s ongoing effort to conclude
its bankruptcy, establishing the Brookfield offer as the one others
must top to be declared the final winner later this year.
During the hearing on Friday, Simon, which made a $33.5 billion buyout offer for General Growth a day earlier, reiterated that it would abandon the bidding if Brookfield prevailed. That’s because Brookfield and its partners in its bid, upon obtaining stalking-horse status, are to begin receiving warrants to purchase 120 million shares of General Growth stock. Any subsequent acquirer of General Growth must pay hundreds of millions of dollars to eliminate those warrants, something Simon doesn’t want to do.
“Simon Property Group will withdraw its superior bid made last night and we will not participate in this process if the warrants in the Brookfield deal are granted today,” David Bryan, an attorney representing Simon, told the judge Friday. “It’s our best and final offer.”
However, little precludes Simon from rejoining the bidding the coming months, because Friday’s ruling simply establishes Brookfield’s bid as the frontrunner rather than the final victor. General Growth executives and attorneys say the board chose the Brookfield offer as an “insurance policy” to have in place for several months in case the company eventually accepts a buyout bid from Simon that is later derailed by antitrust regulators.
“I certainly hope your client would reconsider its position, but that’s entirely its call,” Judge Gropper told Simon’s lawyers. With “the way the process is intended to unfold, the (approval) of the debtor’s motion today is not intended to cut off any opportunity to make an offer for the company. It’s intended to continue that” until a final winning bid is selected in early July.
Combining Simon and General Growth would create a retail-property giant with more than 500 properties in the U.S. and substantial clout in negotiations with retailers. Simon, based in Indianapolis, is the largest U.S. retail landlord with 321 properties. General Growth, based in Chicago, is the second largest with 204 malls. It sought bankruptcy protection in April 2009 after failing to refinance portions of its $27 billion debt load as they came due.
Brookfield’s offer, which includes contributions from Pershing Square Capital Management LP and Fairholme Capital Management, proposes to provide General Growth $6.5 billion to finance its exit from bankruptcy as a standalone company in exchange for two thirds of the company’s stock. The partners earlier agreed to receive 40%, rather than all, of their warrants immediately upon approval Friday and the rest over the coming months. In theory, that concession makes it less expensive for other suitors who might prevail in the final bidding because there would be fewer warrants held by the Brookfield group in the next few months.
Pershing went a step further Friday by agreeing to defer all of the 17 million warrants it is to receive until and if the Brookfield deal prevails and is finalized.
The Brookfield group won key backing for its offer when the committee representing General Growth’s shareholders endorsed it.
On Thursday, Simon submitted what it called a “last and final” offer to acquire General Growth for $33.5 billion in total. That includes $6.5 billion, or $20 per share, for General Growth’s equity and $7 billion in cash to eliminate General Growth’s unsecured debt. Finally, Simon would assume the roughly $20 billion of mortgages on General Growth’s malls. It is the fourth buyout offer Simon has made for General Growth since last August.
Joining Simon in its buyout bids was Blackstone Group LP, which pledged to provide $1.1 billion to own a portfolio of 30 to 40 General Growth malls in partnership with Simon.
Before withdrawing, Simon had two offers on the table for General Growth: the latest buyout offer and a separate recapitalization proposal mirroring Brookfield’s to finance General Growth’s exit from bankruptcy as a standalone company in exchange for an equity stake. Simon’s recapitalization offer is an effort to displace Brookfield as a competitor, specifically by making a duplicate offer minus the requirement for warrants.
Both the Brookfield and Simon proposals contemplate splitting General Growth into two companies: A larger company that owns most of General Growth’s 204 U.S. malls and a smaller entity that holds its riskier assets such as its residential-development business. In its latest $20-per-share buyout bid, Simon offers $15 per share for the larger company and the equivalent of $5 per share for the smaller one. Specifically, Simon would copy Brookfield’s earlier proposal to provide $250 million to backstop a sale of the smaller company’s stock at $5 per share, meaning Simon would buy any shares that aren’t sold.
General Growth’s concerns about antitrust issues have stymied negotiations with Simon. The merged company would own more than 500 U.S. retail properties, including half of the most lucrative malls in the U.S., defined as those with annual sales of $400 per square foot or more, according to estimates by Green Street Advisors Inc.
Simon has insisted that a Simon-General Growth combination would have few, if any, antitrust issues because malls compete with many other retail venues, including big-box stores like Walmart Stores Inc. and online stores.
