A successful merger would make Simon the biggest mall operator in US
After months of speculation, the Simon Property Group on Tuesday finally made an unsolicited US$10 billion offer for General Growth Properties, its bankrupt rival. But General Growth quickly rebuffed the approach, calling the bid too low.
If successful, the move would make Simon the biggest mall operator in the country, controlling about 30 per cent of malls in the United States, according to analysts from Bank of America Merrill Lynch.
Merging the two companies, whose portfolios are roughly the same size, would also unite two of the most well-known names in the business.
In a letter sent to Simon late on Tuesday, General Growth’s chief executive, Adam Metz, said that he would welcome discussions within the confines of the bankruptcy process.
‘We and our board of directors have given considerable thought to your indication of interest and have concluded based on discussions with other interested parties that it is not sufficient to pre-empt the process we are undertaking to explore all avenues to emerge from Chapter 11 and maximise value for all the company’s stakeholders,’ Mr Metz said.
A merger would allow General Growth to finally remove itself from a 10-month, complicated Chapter 11 case. Begun 56 years ago as a shopping centre in Iowa, General Growth grew to be one of the nation’s biggest mall companies, operating prized malls like the Ala Moana Center in Honolulu, only to run aground because of debt troubles after acquiring the Rouse Co for US$12.6 billion in 2004.
Simon Property, whose chief executive, David Simon, is the scion of the company’s founding family, is regarded by analysts as one of the best-managed mall operators in the business.
Over the last year, Simon Property has been building up its war chest to prepare for acquisitions to take advantage of depressed commercial real estate prices, with General Growth squarely in its sights. It said on Tuesday that its offer would be largely financed by its cash on hand and existing credit agreements.
‘They’re the most logical strategic bidder in the whole world for General Growth,’ said James Sullivan, a managing director at Green Street Advisors, a real estate research firm. Mr Sullivan added that other mall operators might be interested in buying pieces of General Growth’s portfolio.
Simon’s move is meant to pre-empt General Growth’s own plan to emerge from bankruptcy, which may include financial help from another mall operator, Brookfield Asset Management, that owns some of its unsecured debt. A hearing on General Growth’s motion to extend the exclusivity period for its plan of reorganisation is scheduled for Monday in federal bankruptcy court in Manhattan.
Simon is portraying its offer as speeding General Growth’s exit from Chapter 11 by paying off US$7 billion in unsecured debt in full and in cash and by assuming about US$21 billion in secured debt. Under the terms of its proposal, Simon would pay about US$6 a share in cash. It would also distribute ownership in General Growth’s planned community development, valued at about US$3 a share.
‘Simon is in the unique position of being able to offer General Growth creditors and shareholders full, fair and immediate value,’ David Simon said in a statement. ‘Our offer provides much-needed certainty to conclude General Growth’s protracted reorganisation process.’ General Growth’s official unsecured creditors committee said in Simon’s statement that it was encouraging talks between the two companies.
In the world of mall operators, gaining size and scale gives companies greater bargaining power over their tenants, especially the national retailers whose stores serve as anchors.
For Simon, which owns many outlet malls as well as some marquee names like Copley Place in Boston, the merger would also present a more formidable rival to other owners of shopping real estate, including Wal-Mart and operators of strip malls and lifestyle centres, Mr Sullivan said. ‘In the mall business, being bigger is better,’ he said.
Advisers for the two companies have met several times in the last few months, according to a person briefed on the matter.
Last week, Simon executives formally presented their offer to General Growth’s chief executive, lead independent director and advisers to discuss its takeover proposal. While advisers for the two companies have talked since then, Simon made the matter public after it received no formal response to its offer.
One question is how one of General Growth’s biggest stakeholders, the hedge fund Pershing Square Capital Management, will respond to Simon’s offer. In a December presentation, Pershing Square’s head, William Ackman, said that based on a comparison with publicly traded rivals, he believed General Growth was worth at least US$24 a share.
Simon is being advised by the investment banks Lazard, JPMorgan Chase and Morgan Stanley and the law firm Wachtell, Lipton, Rosen & Katz. General Growth’s advisers include the investment banks UBS and Miller Buckfire and the law firm Weil, Gotshal & Manges.
Source: Business Times, 18 Feb 2010
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