Commercial Real Estate and Simon Property Group and Real Estate Investment Trust and Real Estate & Retail

Potential for Simon-General Growth deal appears to dim

August 25, 2012

General Growth Properties Inc.’s largest shareholder said it won’t pursue a takeover of the company and has no interest in unloading its stake after investor Bill Ackman urged the mall owner to consider a sale.

Brookfield Asset Management Inc., which owns about 40 percent of General Growth, “is not taking any steps to acquire GGP,” the Toronto-based investor said in a statement late Thursday. Ackman, founder of Pershing Square Capital Management LP, the No. 2 shareholder, said he’s discussed an acquisition of the Chicago-based company with Simon Property Group Inc., and that Brookfield planned to pursue a purchase of its own.

Ackman’s discussions with Indianapolis-based Simon, the only U.S. mall owner larger than General Growth, represent a turnaround from two years ago, when Pershing Square said a combination of the two retail landlords raised antitrust concerns. General Growth left bankruptcy protection in November 2010 following a takeover battle between Simon and an investor group that included Brookfield and Pershing Square.

“We place a small possibility on a sale scenario, especially in light of Brookfield’s response that it is not exploring an acquisition of the whole company, nor is it interested in selling its stake,” UBS AG analysts including Ross Nussbaum wrote in a note Saturday. “We see a much greater likelihood that GGP remains as a standalone entity.”

The analysts lowered their rating on General Growth to neutral from buy after a jump in the shares yesterday left the stock near their target price of $21.

General Growth shares fell 2.8 percent, to $19.76 each, at the close of trading Friday. The stock climbed 9.7 percent Thursday, to $20.32, a four-year high, after Ackman filed the letter with the U.S. Securities and Exchange Commission detailing his discussions with Simon and Brookfield.

Pershing Square and Simon Property discussed a deal in which Simon would acquire its competitor for 0.1765 of a Simon share for each General Growth share, according to Ackman’s letter. Were that ratio used with Simon’s Aug. 22 closing stock price, General Growth would be valued at about $28 a share.

Simon has been “effectively handcuffed and gagged” from pursuing a deal because of Brookfield’s influence over General Growth, Ackman wrote in his letter to General Growth’s board. Brookfield increased its stake in the company after owning about 29 percent, including warrants, in its initial investment.

“Our goals are to ensure that a level playing field exists so that Simon, Brookfield and potentially other parties can compete to acquire the company,” Ackman said in his letter.

Les Morris, a Simon Property spokesman, declined to comment on Ackman’s letter. Ackman didn’t respond Thursday to a request for comment.

General Growth’s board and management team “will carefully review Pershing Square’s letter,” the company said in a statement Thursday.

“Brookfield is not taking any steps to acquire GGP nor is it having any discussions with third parties in that regard,” the Toronto-based real estate investment company said in its statement. “Brookfield has no interest in selling its stake in GGP. We are 100-percent supportive of the current management team of GGP.”

Brookfield said in its statement that it considered “a variety of possible transactions which would facilitate Pershing Square’s desire to maximize the value of and create liquidity for its interest in GGP,” Brookfield said. Those discussions “are not continuing,” according to the statement.

Simon is unlikely to try to buy General Growth without Brookfield’s cooperation, the UBS analysts wrote Friday. Simon never officially made an offer to acquire its rival or Pershing’s stake, they said, citing conversations with the company.

Simon would be a logical buyer for General Growth partly because of cost savings it could achieve by purchasing its competitor, Craig Guttenplan, an analyst at CreditSights Inc. in London, said in a telephone interview Thursday.

Pershing met with David Simon, chief executive officer of Simon Property, last October to talk about the potential stock deal, according to Ackman’s letter. Based on the share ratio discussed, Simon would have paid a 65-percent premium over General Growth’s closing share price the previous day.

In November, Pershing met with Brookfield officials including CEO Bruce Flatt to discuss the proposed Simon deal, according to Ackman’s letter. They indicated that Brookfield didn’t support the transaction, and instead was interested in buying General Growth itself, possibly in partnership with Simon, Ackman wrote.

Brookfield in April proposed buying General Growth and paying for the purchase with proceeds from the sale of 68 of the company’s malls to Simon, according to the letter. Simon rejected the proposal because it didn’t like the selection of malls and believed “the price was too high,” Brookfield told Pershing Square.

Brookfield then decided to try to acquire General Growth without Simon, according to the Ackman’s letter. As part of the proposed deal, Brookfield would consider selling 14 of General Growth’s best malls to Simon or other buyers to raise money.

In July, Brookfield officials including Flatt met with Pershing Square and said they needed more time to prepare a purchase, including a series of securities sales and a purchase of Pershing Square’s General Growth shares. Pershing Square “expressed concern” about the proposed transactions, Ackman said in yesterday’s letter.

“We also explained that Pershing Square was not interested in selling GGP stock other than at a substantial premium,” he wrote.

Ackman is “an activist investor,” Guttenplan said. “He’s looking for ways to maximize value.”

The hedge-fund manager may be using the letter “as a wedge to get out of General Growth,” having made a large enough profit in the investment and wanting to place the money elsewhere, said Rich Moore, an analyst with RBC Capital Markets in Solon, Ohio.
 

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