Simon making $10B bet on future of malls

Wall Street today is cheering Simon Property Group Inc.’s giant bet on the future of retail real estate, a sector that
appeared left for dead just months ago.

The nation’s largest mall owner has offered $10 billion to take over its
nearest rival, Chicago-based General Growth Properties Inc., which is in bankruptcy.

Indianapolis-based Simon says
its bid includes $7 billion to pay General Growth’s unsecured creditors in full and about $3 billion
to the company’s common shareholders. The company also would take on about $21 billion in secured debt on General Growth’s
properties, pushing the deal’s total value to more than $30 billion.

General Growth has 200
high-end mall properties, including Water Tower Place in Chicago and South Street Seaport in New York,
along with $3.4 billion in annual revenue.

The deal would add “a
bunch of high-quality malls to Simon’s portfolio at a very reasonable price,”
said Rich Moore, an Cleveland-based analyst with RBC Capital Markets who expects Simon will close the
deal without competition from other bidders.

“The problem is once Simon
is in the fray and once their intentions are known, it’s very hard for other
bidders to believe they can beat Simon," he said. "Everyone knows Simon can do more with
a mall portfolio than anyone. And if you beat Simon, you have to wonder if you made
a mistake.”

Moore expects Simon will take on a joint-venture partner
on the deal, and he said there will be no shortage of interested partners since high-quality shopping
centers are the most supply-constrained type of real estate.

“Regardless of the price they pay, when you
add this caliber of malls to your portfolio and you’re already a Simon, you have a very very powerful platform,”
Moore said.

A committee of unsecured shareholders, who stand to be repaid in full if a bankruptcy judge endorses
the deal, have signed on in support.

For common shareholders, the Simon offer is valued at about $9 per share,
including $6 in cash and $3 worth of real estate assets. The shares fell as low as 32 cents apiece after General Growth filed
for bankruptcy reorganization.

Still, shareholders are hoping for a sweeter offer. General Growth shares soared
Tuesday, up more than 25 percent, to $11.79 each.

Simon also said its offer might be amended so that shareholders
could receive Simon stock instead of cash, "for those who would prefer to participate in the upside associated with owning
Simon stock."

Simon shares also were up in early trading Tuesday, rising more than 2 percent, to $73.55 each.

The combination of Simon and General Growth would own 525 malls with 450 million square feet of retail space—five
times more real estate than the worldwide footprint of McDonald’s Corp. It would give Simon high-performing
properties it has long coveted, including Fashion Show in Las Vegas and Faneuil Hall Marketplace in Boston.

Total domination of the U.S. shopping mall business, and the corresponding leverage with retail
tenants, has been CEO David Simon’s goal since he took over the company in 1995. If he lands General
Growth, call it mission accomplished.

But Simon’s success is no sure thing. A well-capitalized
competitor, Canada-based Brookfield Asset Management Inc., has offered to invest capital so that General
Growth could emerge from bankruptcy. And activist investor Bill Ackman, whose Pershing Square Capital Management
owns about 25 percent of General Growth, has said he believes the shares are worth at least $24 apiece.

General
Growth’s response to Simon’s offer suggests its executives aren’t thrilled with the idea, although a bankruptcy judge could
force them to the table.

Simon said it submitted its offer on Feb. 8 but made the proposal public Tuesday, claiming
it had not yet received a "substantive response" from executives.

“Simon’s offer provides
the best possible outcome for all General Growth stakeholders,” David Simon said in a statement released Tuesday morning.
“Simon is in the unique position of being able to offer General Growth creditors and shareholders
full, fair and immediate value. Our offer provides much-needed certainty to conclude General Growth’s
protracted reorganization process.”

General Growth filed the biggest real-estate bankruptcy in U.S. history
in April after amassing $27 billion in debt during an acquisition spree. At the time of the filing, the company said it had
about $11.8 billion in debt that had matured or was due by the end of 2012.

Simon has been in a acquisitive mood,
having agreed in December to buy the Prime Outlets chain and its 22 malls in a deal worth $2.3 billion. In the last 15 years,
the company has closed on properties worth more than $25 billion.

But the company also has shed some assets to
ready for a big deal. Simon and a partner agreed earlier this month to sell stakes in seven malls in France and Poland to
Unibail-Rodamco SE, Europe’s biggest shopping-center owner.

Simon expected to book a gain of about $300 million
on the European deal, further growing its cash war chest, which stood at $4.3 billion at the end of 2009. The company has
another $3.1 billion available on a credit line.

Simon said it would use its own cash, along
with equity from co-investors it did not name, to complete a General Growth deal.

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