Blackstone may join General Growth plan, Simon says

April 27, 2010

Indianapolis-based Simon Property Group Inc., the mall owner bidding to bring General Growth Properties Inc. out of bankruptcy, is in talks to add Blackstone Group LP as a partner in its investment, CEO David Simon said.

The companies are in “ongoing discussions” for an investment in General Growth after the mall operator turned down a $10 billion takeover bid from Simon in February, the CEO said Tuesday. Simon Property has already lined up Paulson & Co., ING Clarion Real Estate Securities, Taconic Capital Advisors, Oak Hill Advisors LP and Deutsche Bank AG’s RREEF as backers in its recapitalization proposal.

Blackstone’s “No. 1 focus has been on being our partner if we’re able to buy the company,” Simon said from the Milken Institute Global Conference in Beverly Hills, Calif. “But I think they are considering whether they want to buy some stock as part of a recap as well.”

General Growth, the biggest U.S. mall owner after Simon, has endorsed a rival bankruptcy exit plan led by Brookfield Asset Management Inc. of Toronto. David Simon, who is seeking to gain so-called stalking horse status in an auction for General Growth, is trying to “stack the odds in his favor” with the Blackstone talks, said Omotayo Okusanya, managing director at Jefferies Group Inc. in New York.

“The more prestigious investors on his side willing to put money on a potential investment recapitalization, the better for him when a bankruptcy judge is looking at his proposal,” Okusanya said.

David Simon says his offer is better for General Growth shareholders because, unlike Brookfield’s plan, it doesn’t include issuing warrants that may dilute stock value. Simon estimates the warrants could cost General Growth shareholders $895 million, while General Growth puts the warrants’ value at about $519 million.

Simon Property said in a bankruptcy court filing last week that it should replace Brookfield as the stalking horse, a change that would make it the first bidder to put an initial value on Chicago-based General Growth. A hearing on the issue is scheduled for May 4.

Simon won’t bid for General Growth if Brookfield wins the designation and receives warrants, David Simon said.

“To the extent that the Brookfield plan gets done, and the warrants get implemented, we will not participate in the auction that the company is going to ultimately run in bankruptcy,” Simon said. The warrants would make General Growth “too expensive,” he said.

Simon last week announced the addition of ING Clarion, Taconic Capital, Oak Hill and RREEF to its bid, increasing the plan’s total investment by $1.1 billion. Simon has pledged $2.5 billion, while New York-based Paulson committed $1 billion.

David Simon declined to say how much Blackstone would add to the plan were it to join as an investor.

“They’re considering what they want to do,” he said.

Christine Anderson, a spokeswoman for New York-based Blackstone, declined to comment.

Blackstone, the world’s biggest private-equity firm, has been seeking mall investments, said Cedrik Lachance, senior analyst with Green Street Advisors in Newport Beach, Calif. The company bought stakes in two retail centers last year as part of a joint venture with Glimcher Realty Trust.

General Growth filed the largest real estate bankruptcy in U.S. history a year ago 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.

“We continue to believe our offer is the most compelling for all stakeholders, including existing shareholders,” Cyrus Madon, Brookfield’s senior managing partner for restructuring and lending, said Tuesday in an e-mail. A Simon investment would ensure that General Growth “will not be able to function effectively and eventually be sold to Simon and no one else.”

Simon’s offer raises antitrust concerns, according to the plan’s opponents, who include Bruce Berkowitz, founder of Miami- based Fairholme Capital Management LLC, General Growth’s biggest debt holder and a partner in the competing Brookfield proposal. Berkowitz said in an April 16 interview that the Simon plan “is not healthy for competition.”

David Simon today dismissed those concerns, saying his company has a “fiduciary duty” to its investment partners as well as its shareholders to see that General Growth prospers.

“The fact is that we’re going to be a passive shareholder, and we’re going to have a reduced voting stake -- less than our economics,” Simon said. “Our directors aren’t going to be involved in anything that has any inkling to do anything with Simon. What they do operationally we’re not going to be involved in, period, end of story.”

Simon Property said last week that its selections for General Growth’s board are Dale Anne Reiss, a former senior partner at Ernst & Young LLP, and Peter D. Linneman, a professor of real estate finance and public policy at the Wharton School at the University of Pennsylvania, both of whom are unaffiliated with Simon. David Simon said the two directors would recuse themselves on any General Growth board decisions where there would be a conflict with Simon Property’s operations.

David Simon said that while he is focused on a passive investment in General Growth, his offer would allow a potential buyer for the company, whether it be Simon or another bidder, to step up, something unlikely under the Brookfield plan with the warrants it includes.

“It will dampen the competitive auction that they want to run with the court,” Simon said. “It’ll have that impact on us, and it will frankly have that impact on anybody else who’s out there. Those warrants will debilitate the auction process that the company wants to undertake, ultimately, as part of the bankruptcy procedures.”


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