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Simon Property steps up fight for General Growth

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Simon Property Group Inc., the largest U.S. mall owner, stepped up its fight for General Growth Properties Inc. with a new takeover offer as its bankrupt rival endorsed a financing plan by Brookfield Asset Management Inc.

Simon offered about $5.8 billion in stock and cash to buy General Growth and said it would pay down about $7 billion of unsecured debt, a person with knowledge of the new bid said. The proposal is the Indianapolis-based company’s third attempt to buy or gain a piece of the No. 2 mall owner. A $10 billion buyout bid was spurned in February, and General Growth Monday said it will support a revised plan by Brookfield in bankruptcy court over a similar one proposed by Simon last month.

The competing offers come ahead of a court hearing scheduled for Wednesday to determine General Growth’s auction process. Simon won’t make any more proposals should its latest one be turned down or if the court approves Brookfield’s plan, which includes issuing warrants that make a takeover more costly, the person familiar with Simon’s bid said.

“It’s been pretty clear that Brookfield wants to win this thing, and for Simon it’s not an everyday occurrence to get a portfolio the size and scale of General Growth,” Alexander Goldfarb, an analyst with Sandler O’Neill & Partners LP in New York, said in an interview. “It comes down to the judge’s decision.”

General Growth is scheduled to go before U.S. Bankruptcy Judge Allan Gropper in Manhattan Wednesday to seek approval of the Brookfield-led plan. The revised proposal by Brookfield and its partners, Fairholme Capital Management LLC and Pershing Square Capital Management LP, has “significantly enhanced terms” over the group’s original investment agreement, General Growth said in court documents filed in Manhattan Monday.

Goldfarb and Benjamin Yang of Keefe, Bruyette & Woods Inc. in San Francisco said it’s likely that Gropper will approve the Brookfield-led plan.

“So far, the judge has given GGP leeway in plotting its exit strategy,” Yang wrote late in a note to investors. “Given how much progress GGP’s management and board have made since filing for bankruptcy a year ago, including stirring up interest in the company from multiple bidders, we believe the judge will be more likely to follow the board’s recommendation.”

The latest Brookfield proposal has as much as $7 billion in equity commitments, $500 million more than the prior one, and includes an optional backstop for $1.5 billion in debt financing if the company asks for it, according to court documents.

Under the new plan, Toronto-based Brookfield and its partners would get 40 percent of 120 million stock warrants they’re seeking once their proposal is approved by the court. They would receive 20 percent more on July 12, and the remainder over the course of their commitment to General Growth.

Staggering the warrants would lower the extra price another bidder, such as Simon, would have to pay should it make an offer for the company. Simon’s competing investment plan, submitted last month, eliminates the warrants.

General Growth’s board favors the Brookfield deal because it will foster more competitive bidding, including the potential sale of the company before or after its exit from bankruptcy, the Chicago-based company’s lawyers wrote.

“General Growth has concluded that accepting a minority investment from Simon Property Group, even one without the warrants, would likely deter other parties from putting together a competing proposal and overall create a one-horse race,” lawyers for General Growth wrote in the filing. The company is reviewing the newest Simon takeover, received Sunday, according to the filing.

In an interview last week, Simon CEO David Simon said warrants would make General Growth “too expensive” to purchase.

Under Simon’s new offer, the company would pay $13.25 a share for the new General Growth Properties, $10 in Simon stock and $3.25 in cash, and would back-stop the $5-a-share offering for a company to be spun off, General Growth Opportunities, said the person familiar with the plan.

Simon also would pay down about $7 billion in unsecured General Growth debt and assume more than $20 billion of mortgages, the person said.

Les Morris, a spokesman for Simon, said he had no comment.

General Growth won’t be able to go to court “without having some response to Simon’s topping offer,” said David Fick, an analyst with Stifel Nicolaus & Co. in Baltimore. General Growth probably will seek a delay of the court hearing to negotiate with Simon, he said.

Fick expects Simon to ultimately succeed in purchasing its rival.

“It doesn’t make sense as a standalone,” he said of General Growth.

General Growth filed the largest real estate bankruptcy in U.S. history in April 2009 after amassing $27 billion in debt making acquisitions. Its properties include New York’s South Street Seaport, Boston’s Faneuil Hall and the Grand Canal Shoppes and Fashion Show in Las Vegas.

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