Another General Growth suitor enters fray

March 23, 2010

Elliott Associates LP and Paulson & Co. are discussing a plan to team with Brookfield Asset Management Inc. to bring mall owner General Growth Properties Inc. out of bankruptcy, two people familiar with the talks said.

The hedge funds, which have spoken with General Growth, would try to replace or join Fairholme Capital Management LLC and Pershing Square Capital Management LP in a bankruptcy exit plan with Brookfield, said the people, who asked not to be identified because the talks are private. Elliott and Paulson’s alternative proposal may also include Luxor Capital Group LP or other funds, one of the people familiar with their plans said.

“It’s not surprising to see Paulson or Elliott potentially step up to the plate,” said Benjamin Yang, an analyst at Keefe Bruyette & Woods Inc. in San Francisco. “Even with Brookfield- Fairholme-Pershing’s commitment, GGP management has been seeking to raise additional capital at more attractive terms.”

General Growth last month rejected a $10 billion buyout offer by Indianapolis-based Simon Property Group Inc., the biggest U.S. mall owner, that would have given equity holders $9 a share and paid off unsecured creditors in cash. Simon is preparing a new offer, according to a person with knowledge of that plan. The Fairholme-Pershing proposal needs bankruptcy-court approval, giving other investors the chance to make competing bids.

“Anything that happens external to Simon is all noise and someone trying to get involved in the friction of the deal,” said David Fick, an analyst with Stifel Nicolaus & Co. in Baltimore. “These assets are more productive in Simon’s hands by a lot.”

Bruce Berkowitz’s Fairholme and William Ackman’s Pershing Square earlier this month offered to jointly invest $3.93 billion in General Growth in addition to $2.63 billion pledged by Toronto-based Brookfield. Under that plan, Fairholme would receive seven-year warrants to buy 60 million shares of existing General Growth stock at an exercise price of $15 each.

A new add-on to the Brookfield plan could be made more attractive if there were fewer warrants issued, said Jim Sullivan, an analyst with Green Street Advisors in Newport Beach, Calif.

“The smaller the warrant grant, the better it is for the other stakeholders—the equity in particular,” he said.

New York-based Elliott has a 5.3-percent stake in General Growth, according to a March 18 regulatory filing. Elliott, founded by Paul Singer, oversees $16.2 billion. Paulson manages $32 billion out of New York.

Armel Leslie, a spokesman for Paulson, declined to comment, as did a spokesman for Elliott. Officials at Luxor Capital didn’t return phone messages. Janice Aman, a spokeswoman for Fairholme, and Denis Couture, a spokesman for Brookfield, also declined to comment, as did Ackman and David Keating, a General Growth spokesman.

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

New York-based Pershing Square is General Growth’s biggest equity investor, with a 25-percent economic interest, including 7.5 percent of its shares. Fairholme is the largest creditor, with about $1.83 billion of General Growth’s unsecured debt, Berkowitz and Ackman said in a letter filed March 9 with the U.S. Securities & Exchange Commission. Pershing Square owns about $434 million of unsecured debt, according to the letter.

Their plan calls for Fairholme and Pershing Square to buy about 380 million new General Growth shares at $10 each.

The investments would combine with 250 million shares Brookfield would buy, $1.5 billion in new debt Brookfield is raising, and a $250 million rights offering for a new company, General Growth Opportunities. Brookfield would backstop $125 million of that sale, meaning it will buy that much if other investors don’t, and Fairholme and Pershing would backstop the rest. Combined, more than $8 billion would be raised.

Brookfield’s plan with Fairholme and Pershing would give General Growth equity holders $15 a share, compared with about $9 a share under Simon’s offer.

General Growth shares have climbed past Brookfield’s offer, indicating investors expect a higher bid. They gained 5 cents Monday to close at $16.80 each.


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